The trial balance is at the heart of the accounting cycle—a multi-step process that takes in all of your business’ financial transactions, organizes them, and turns them into readable financial statements. If you’ve ever wondered how accountants turn your raw financial data into readable financial reports, the trial balance is how. After correcting the adjusted trial balance, we create the post-closing trial balance with only permanent accounts (assets, liabilities, equity).
In other words, it’s a summation of all of the financial transactions that have occurred during that stage. The equality of the two totals in the trial balance does not necessarily mean that the accounting process has been error-free. Serious errors may have been made, such as failure to record a transaction, or posting a debit or credit to the wrong account. For instance, if a transaction involving payment of a $ 100 account payable is never recorded, the trial balance totals still balance, but at an amount that is $ 100 too high. The purpose of the trial balance is to test the equality between total debits and total credits after the posting process.
The debits and credits include all business transactions for a company over a certain period, including the sum of such accounts as assets, expenses, liabilities, and revenues. By now, we are clear that trial balance’s primary objective is to ascertain the accuracy and detection of errors. With the diversity of business operations and the frequent need for financial statements, most businesses are using accounting software for managing the books and generating financial statements. Accounting software like TallyPrime, is designed to ensure that debit and credit always match at the time of recording the transaction itself. Thus, matching the trial balance is a ‘Thing in the Past’, and the traditional need for someone to depend on the trial balance is eradicated.
As the bookkeepers and accountants examine the report and find errors in the accounts, they record adjusting journal entries to correct them. After these errors are corrected, the TB is considered an adjusted trial balance. At this point you might be wondering what the big deal is with trial balances. Did we really go through all that trouble just to make sure that all of the debits and credits in your books balance? You’re now set up to make financial statements, which is a big deal.
A trial balance simply shows a list of the ledger accounts and their balances. Its purpose is to test the equality between total debits and total credits. Trial Balance is a technique for checking the accuracy of the debit and credit amounts recorded in the various ledger accounts. It is basically a statement that exhibits the total of the debit and credit balances recorded in various accounts of ledger. Accordingly, Trial Balance is prepared to check the accuracy of the various transactions that are posted into the ledger accounts.
The adjusted trial balance is what you get when you take all of the adjusting entries from the previous step and apply them to the unadjusted trial balance. It should look exactly like your unadjusted trial balance, save for any deferrals, accruals, missing transactions or tax adjustments you made. If the sum of the debit entries in a trial balance (in this case, $36,660) doesn’t equal the sum of the credits (also $36,660), that means there’s been an error in either the recording of the journal entries.
However, a business may choose to prepare the Trial Balance at the end of any specific period. This could be at the end of each month, quarter, half a year or a year as per the need. You’ll also need to close each balance to ensure that you focus on a specific time — usually, the duration of your accounting cycle, whether monthly or quarterly. Another way to find an error is to take the difference between the two totals and divide by nine. If the outcome of the difference is a whole number, then you may have transposed a figure. For example, let’s assume the following is the trial balance for Printing Plus.
When the trial balance does not balance, try re-totaling the two columns. If this step does not locate the error, divide the difference in the totals by 2 and then by 9. If the difference is divisible by 2, you may have transferred a debit-balanced account to the trial balance as a credit, or a credit-balanced account as a debit. When the difference is divisible by 2, look for an amount in the trial balance that is equal to one-half of the difference. You can perform an adjusted trial balance once your book is balanced.
Premium bakery Cutter & Squidge sells cakes and more through its London-based store and café, as well as a nationwide eCommerce business. Baked fresh every day, there’s a constant flow of ingredients coming in one end and treats flowing out the other. Using a trial balance in accounting on an ongoing basis helps Co-Founder and CEO, Annabel Lui, retain control of the company’s cash flow. “If you’re not financially minded, it’s easy to run out of cash quite quickly,” she says. “Trial balance can help you keep an eye on that.”
An unadjusted trial balance is what you get when you calculate account balances for each individual account in your books over a particular period of time. Run your business long enough, and you’ll accumulate a long list of debits and credits in your company’s ledger, which is a chronological list of all your business’s transactions. The creation of the financial statements mark the end of the given financial hedge accounting may be more beneficial after fasbs changes cycle. Now a new period begins, and the accounting department returns to the first step of collecting and analyzing transactions. A balance sheet, on the other hand, lists the assets, liabilities and equities for a single point in time. Although it serves as an important internal document, its central purpose is to communicate a company’s financial health to investors and stakeholders outside the company.
Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock ($20,000) and Service Revenue ($9,500) all have credit final balances in their T-accounts. These credit balances would transfer to the credit column on the unadjusted trial balance. Transferring information from T-accounts to the trial balance requires consideration of the final balance in each account. If the final balance in the ledger account (T-account) is a debit balance, you will record the total in the left column of the trial balance.
A balance sheet helps the user quickly get a handle on the financial strength and capabilities of the business along with its weaknesses. Since the owner’s equity’s normal balance is a credit balance, an expense must be recorded as a debit. Similarly, incomes cause the owner’s equity to increase, and hence an income is recorded as a credit. The following video summarizes what elements are included in a Trial Balance and why one is prepared. The trial balance is the edit phase of our story before we publish the results in financial statements. This is where you can make the mistake of recording items in the wrong column or even the wrong account.
Back when accounting was still recorded on paper, an accountant recorded transactions within individual accounts, such as accounts receivable, inventory and accounts payable. Now, with accounting software, all these transactions are stored within a database. Not so very long ago, when accounting was calculated on paper, the trial balance played a central role in keeping tabs on the company’s financials. Now, with the adoption of accounting software into most businesses, the trial balance is not as central, but it’s still a part of the cycle.
Similarly, the remaining debit or credit balances of all the accounts of ledger are recorded in the debit or credit columns of trial balance respectively. A trial balance sheet is a report that lists the ending balances of each account in the chart of accounts in balance sheet order. Bookkeepers and accountants use this report to consolidate all of the T-accounts into one document and double check that all transactions were recorded in proper journal entry format. Its purpose is to summarize all account balances to be certain that total debits equal total credits after the entries have been journalized and posted. Business transactions are first recorded in the form of journal entries following the basic accounting principles.
Nobody wants to run out of cash for a few weeks and be pressured to take out a high interest loan just to cover rent and payroll. It’s sometimes the way of things that a business presents a united front, but a glimpse behind the scene reveals a tangled mess.