TutorialKart.comWhat Is a Trial Balance in Accounting?
A trial balance is an accounting report that lists the closing debit or credit balance of every general ledger account on a specific date. It normally includes asset, liability, capital, revenue, expense, and drawing accounts.
The report is prepared after transactions have been recorded in journals and posted to the ledger. Its main purpose is to confirm that the total debit balances equal the total credit balances before financial statements are prepared.
A trial balance is an internal accounting worksheet rather than a financial statement. Accountants use it as a starting point for preparing the income statement, balance sheet, and other reports.
Trial Balance Debit and Credit Rules
Each ledger balance must be entered in the correct trial balance column according to the normal balance of the account.
- Assets normally have debit balances.
- Expenses normally have debit balances.
- Drawings or owner withdrawals normally have debit balances.
- Liabilities normally have credit balances.
- Capital or owner’s equity normally has a credit balance.
- Revenue and income accounts normally have credit balances.
The debit and credit columns must have equal totals. However, individual accounts do not need to have equal debit and credit amounts. Each account generally appears with only its net debit balance or net credit balance.
To understand why an account is debited or credited, review the golden rules of accounting.
Methods of Preparing a Trial Balance
A trial balance can be prepared using any of the following methods:
- Total method: The total debit and total credit of each ledger account are entered in separate columns.
- Balance method: Only the closing debit or credit balance of each ledger account is entered. This is the most commonly used method.
- Total and balance method: Both the account totals and the closing balances are shown in separate columns.
Steps to Prepare a Trial Balance
- Complete the journal entries for the accounting period.
- Post each journal entry to the appropriate general ledger account.
- Calculate the closing balance of every ledger account.
- Write the account names in the trial balance in a consistent order.
- Enter debit balances in the debit column and credit balances in the credit column.
- Add the debit column and the credit column separately.
- Confirm that the total debits equal the total credits.
- Investigate posting, calculation, or classification errors when the totals do not agree.
Trial Balance Example
Assume a business has the following ledger balances at the end of an accounting period:
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Cash | 12,000 | |
| Accounts Receivable | 4,000 | |
| Equipment | 10,000 | |
| Rent Expense | 2,000 | |
| Accounts Payable | 5,000 | |
| Owner’s Capital | 15,000 | |
| Service Revenue | 8,000 | |
| Total | 28,000 | 28,000 |
Because both columns total $28,000, the ledger is arithmetically balanced. This agreement does not prove that every transaction was recorded correctly, but it confirms that equal debits and credits were posted in total.
Purpose and Advantages of a Trial Balance
- Summarizes all ledger balances in one report.
- Checks the mathematical equality of total debits and credits.
- Helps locate certain posting and calculation errors.
- Provides the balances required to prepare financial statements.
- Supports the preparation of adjusting entries at the end of an accounting period.
- Creates a convenient record for reviewing unusual or unexpected account balances.
Errors a Trial Balance Can Detect
An unequal trial balance may indicate one or more of the following errors:
- A debit was posted without the corresponding credit, or vice versa.
- A ledger balance was entered in the wrong trial balance column.
- An account balance was omitted from the report.
- A ledger balance or column total was calculated incorrectly.
- Different amounts were posted to the debit and credit sides of a transaction.
- A number was transposed, such as entering $540 instead of $450.
Errors Not Disclosed by a Trial Balance
A balanced trial balance does not guarantee that the accounting records are completely accurate. The following errors can remain even when total debits equal total credits:
- Complete omission: A transaction was not recorded at all.
- Error of principle: A transaction was recorded in the wrong type of account, such as treating equipment as an expense.
- Error of original entry: The same incorrect amount was recorded on both the debit and credit sides.
- Compensating errors: Two or more unrelated errors offset each other.
- Complete reversal: The correct accounts were used, but the debit and credit entries were reversed.
- Wrong account with the same normal balance: An amount was posted to the wrong customer, supplier, revenue, or expense account.
Unadjusted, Adjusted, and Post-Closing Trial Balances
- Unadjusted trial balance: Prepared before period-end adjustments are recorded.
- Adjusted trial balance: Prepared after adjusting entries for accruals, deferrals, depreciation, and other period-end items have been posted. It is used to prepare financial statements.
- Post-closing trial balance: Prepared after temporary accounts such as revenue, expense, and drawings accounts have been closed. It contains only permanent balance sheet accounts.
Trial Balance and Balance Sheet Differences
| Basis | Trial Balance | Balance Sheet |
|---|---|---|
| Purpose | Checks ledger balances and supports the accounting process | Reports the financial position of a business |
| Accounts included | Assets, liabilities, equity, revenue, expenses, and drawings | Assets, liabilities, and equity |
| Audience | Mainly internal accounting staff | Internal and external users |
| Timing | Can be prepared whenever ledger balances need to be checked | Prepared at the reporting date |
| Format | Debit and credit columns | Assets compared with liabilities and equity |
Format of Trial Balance in Accounting
A standard trial balance contains the account name, ledger reference where required, debit balance, and credit balance. The report should also state the business name and the date on which the balances were extracted.
Trial Balance Questions and Answers
Why must a trial balance have equal debit and credit totals?
Every properly recorded transaction has equal debit and credit entries. Therefore, the combined debit balances should equal the combined credit balances after all ledger accounts are summarized.
Does a balanced trial balance prove that there are no accounting errors?
No. It confirms only the arithmetic equality of debits and credits. Errors such as complete omissions, incorrect account classifications, and equal errors on both sides may remain undiscovered.
Which accounts appear on the debit side of a trial balance?
Assets, expenses, and drawings normally appear on the debit side. An account may appear on the opposite side when it has an unusual balance, such as an overdrawn bank account.
When is an adjusted trial balance prepared?
An adjusted trial balance is prepared after period-end adjusting entries have been recorded and posted. Its balances are used to prepare the financial statements.