Trial Balance: Definition, How It Works, Purpose, and Requirements

The key difference between a trial balance and a balance sheet is one of scope. A balance sheet records not only the closing balances of accounts within a company but also the assets, liabilities, and equity of the company. It is usually released to the public, rather than just being used internally, and requires the signature of an auditor to be regarded as trustworthy. So why take the risk of not preparing your financial statements accurately when you just need to follow a few simple steps using the trial balance method?

  • If the numbers don’t match, it’s a clear indication that there are errors somewhere in the ledgers that need to be identified and corrected.
  • We note below several ways in which errors could occur and yet not be spotted by reviewing the trial balance.
  • Creating a trial balance is the first step in closing the books at the end of an accounting period.
  • The adjusted trial balance is typically printed and stored in the year-end book, which is then archived.
  • A company prepares a trial balance periodically, usually at the end of every reporting period.

Business owners can also use them as a summary of account performance during an accounting period. Moreover, the trial balance is also prepared to detect any error in the mathematical calculation. A key objective of preparing a trial balance is to summarise the financial transactions while continuing with the business activities. It helps the business management to make necessary decisions regarding changes in the finances and business activities. Ever thought about what will happen if we do not segregate our financial transactions into debit and credit amounts?

Examples of trial balance in a Sentence

The adjusted trial balance would correct the error by adding a $600 debit to expenses. Each month, you prepare a trial balance showing your company’s position. After preparing your trial balance this month, you discover that it does not balance. Note that for this step, we are considering our trial balance to be unadjusted. The unadjusted trial balance in this section includes accounts before they have been adjusted. As you see in step 6 of the accounting cycle, we create another trial balance that is adjusted (see The Adjustment Process).

The purpose of the trial balance is to make sure that all debits equal credits for each account in your ledger. This helps you to see if there are any problems with the books or if there are any anomalies. If everything balances, then there are no issues with your bookkeeping, but if it doesn’t, then you need to find where the differences are. Once all balances are transferred to the unadjusted trial balance, we will sum each of the debit and credit columns. The debit and credit columns both total $34,000, which means they are equal and in balance.

  • Therefore, it’s important to monitor all accounting procedures for accuracy.
  • Business owners may also choose to prepare a trial balance in the middle of a standard reporting period to assess financial position and ensure that accounting systems are on track.
  • A debit increases the amount in the account, while a credit decreases it.
  • Back when accounting was still recorded on paper, an accountant recorded transactions within individual accounts, such as accounts receivable, inventory and accounts payable.
  • Hopefully, this fills in some gaps and highlights some key terms used when discussing a trial balance.

Then these totals are entered in the debit and credit columns of the trial balance. A trial balance is an internal accounting report showing a general ledger of all accounts at a single point in time. In a trial balance, the debits and credits equal one another, as each journal entry offsets a corresponding credit or debit. The trial balance is normally only seen by people within the company. Adjusted trial balances can also remove advanced payments or take into account liabilities that have not been incurred during the accounting period but should be factored into financial reports.

Thereafter, a list of
all the accounts is prepared in a separate sheet of paper with
two “amount” columns on the right hand side. The first one for
debit amounts and the second one for credit amounts. The total
of debit side and credit side of each account is then placed on
“debit amount” column and “credit amount” column respectively of
the list. Finally the two columns are added separately to see
whether they agree of not.

What is the Purpose of a Trial Balance in the Accounting Cycle?

Often the cause of the difference was a miscalculation of an account balance, posting a debit amount as a credit (or vice versa), transposing digits within an amount when posting or preparing the trial balance, etc. If the totals don’t match, a missing debit or credit entry, or an error in copying over from the general ledger account may be the cause. But there could still be mistakes or errors in the accounting system even if the amounts do match.

What is the purpose of Trial Balance

If the numbers don’t match, it’s a clear indication that there are errors somewhere in the ledgers that need to be identified and corrected. Such uniformity guarantees that there are no unequal debits and credits that have been incorrectly entered during the double entry recording process. However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes. The problem arises when the two totals do not balance, this means there is an error in the books of accounts and the financial statements cannot be prepared now. With modern accounting tools, credit and debit balances are checked against each other automatically, making trial balances somewhat obsolete.

Difference Between Trial Balance and Balance Sheet

The Trial Balance has already recorded the entire cost of the purchases. The closing stock would be tallied twice in the Trial Balance if it were included. In case of this method, the trial balance contains both the totals of both sides of the respective accounts as well as their final balances.

Omission of Posting of One aspect of a Transaction

All the businessmen after completion of postings from Journal or Subsidiary Books to the Ledger, want to verify accuracy of the posting. On the basis of principal of accounting we know that for every debit there will be an equal credit. The financial statements are significant documents that capture the financial state of a company at a given point in time. They’re helpful for analyzing how a company has grown since the earlier period, and are useful for outside investors to determine if the company makes a prudent investment. Due to their similar name, it’s easy to confuse the trial balance with the balance sheet, or to think they’re one and the same.

In other words, the trial balance is designed to show all of your balances, so you can see what the company owns at that time, what it owes, and if there are any issues with the books. A trial balance allows a company to quickly gauge its books and to know whether or not it’s standing on solid ground. It can provide an indication for any internal auditing work to do as well.