What is a Trial Balance

A trial balance is an accounting report that lists all nominal accounts within a business’s ledger. These accounts are organised into two columns, one showing debit balances and the other showing credit balances.

In double-entry bookkeeping, each transaction is recorded with a debit and a credit entry. In the example, the sum of all debits and credits will balance out, ensuring account accuracy.

The purpose of a trial balance is to ensure that the total of all debit balances matches the total of all credit balances, highlighting the fundamental principle of double-entry bookkeeping.

This report plays a pivotal role in the accounting cycle, marking its final step before preparing financial statements. It acts as a tool for accountants and business owners to verify the accuracy of bookkeeping entries and to identify any potential errors that may have occurred during the accounting period.

A Trial Balance includes the figures from the Profit and Loss (Income Statement) and the Balance Sheet financial statements. The accounts included are the bank, stock, debtors, creditors, wages, expense codes and sales.

Although a trial balance may equal the debits and credits, it does not mean the figures are correct. Errors can still occur in data entry of wrong amounts or posted to the incorrect account code.

Preparing a Trial Balance Report

Most software accounting packages include a trial balance as part of their reports section, and due to the software always posting a double entry, the report will balance. To prepare the trial balance, select the period end date required; this may be month, quarter or year-end.

Here are some accounting packages we recommend looking at and taking out a trial to see if they suit your business. FreshBooks, Xero and QuickBooks.

Using a manual system, you can make a mistake, and the report is not equal on both sides. The difference between the credit and debit will have to be found, and ensure that it balances.

The report will only show the totals of the postings to the accounts if a user error has occurred or a transaction is posted to the wrong account; it will not be visible. A transaction might also be completely missing from the report. It is, therefore, essential that checks are put in place to check some individual ledgers.

What is a Trial Balance? – Uses

Year-end

The report is helpful to accountants and auditors at the end of the year to see a complete picture of the company in one place.

What adjustments do accountants make?

An accountant uses the trial balance to determine whether any adjustments need to be made to the financial records. This could involve correcting errors identified in the accounts, ranging from simple data entry mistakes to more complex discrepancies.

Additionally, the end of the financial year often necessitates a set of adjustments to ensure that the accounts accurately reflect the financial position of the business. These year-end adjustments can include depreciation provisions, inventory value adjustments, or recognising any accrued expenses that have not yet been documented.

There are a few year-end adjustments, including:

• Depreciation of fixed assets
• Writing off bad debt
• Accruals
• Prepayments

Once the adjustments are complete, the trial balance will be reviewed again.

Trial Balance for New Software

The other main use of a trial balance is if you are switching accounting packages or using one for the first time. Reviewing the report using the old and new software will ensure the figures match.

Selecting the best time to transition to new software is crucial for a smooth process; the end of the year serves as an ideal period. This timing allows businesses to switch, ensuring minimal disruption to operations and providing an opportunity to start the new year with a new system.

To complete the switch, run the trial balance from the old software and enter the figures as the opening balances in the new software. Running the report in the new software is always good practice to ensure everything is posted to the correct account.

When switching to accounting software, take out a free trial to confirm that the package suits the business. QuickBooks is popular, especially with 90% discounts for 7 months.

If you are starting a new business, you will not need a trial balance to open the accounts; instead, you can use the bank opening balance and any transactions to commence the business.

What is a Trial Balance – Format

The Trial Balance format includes the following information:

• Report header: Company Name and date
• Columns: Ledger account codes, if used, and account names, credits and debits amount
• Total of the Debit column and Credit column

All the accounts that make up the balance sheet (assets, liabilities and Equity) are first followed by the profit and loss accounts (sales and expenses).

You do not need to include any zero-balance accounts.

What is a Trial Balance? – Debits and Credits

Accounting is a double entry system, so there will be a credit balance for each debit balance. Debits and credits make up the general ledger.

An example of a debit entry is a sales invoice issued for 1000.00; the transaction will be posted in sales and the debtor’s account. By posting these two entries, the trial balance will always be equal.

Below is a simple table for debit and credit for double entry.

Trial Balance Example

Below is an example downloaded from Quickbooks into Excel. The figures include all the balances from both the balance sheet and the Profit and Loss account. The totals of debits and credits are the same, and therefore, it balances.

This trial balance example includes all the balance sheet items first, followed by the profit and loss account.

You will require a journal entry if you review the trial balance and notice that an adjustment is necessary. The journal entry will need a debit and credit. Accounting systems will not accept a journal unless it balances. Looking at the trial balance makes it easier to decide what the journal entries are.

Trial Balance Conclusion

In conclusion, the trial balance is a crucial tool in the accounting process that allows for the detection of errors and ensures the accuracy of financial statements. It provides a snapshot of a company’s financial health at a specific time and helps identify any discrepancies between debits and credits. By reviewing the trial balance, accountants can correct errors and produce accurate financial reports.

A trial balance includes all the general ledger accounts of the business in one report, provides a snapshot of a company’s financial health at a specific point in time, and helps to identify any discrepancies between debits and credits. By reviewing the trial balance, accountants can correct errors and produce accurate financial reports.

It has two columns, debit and credit. The two columns should balance.

Return from what is a trial balance to the Accounting basics page.

Further reading on what is a trial balance is available on Wikipedia.