Every company and organization must periodically check its bookkeeping to ensure that the math is correct. A trial balance is one avenue of ascertaining that mathematical accuracy. A trial balance is a worksheet that assembles all of a company’s ledgers into two columns: debit and credit. The totals of each column should be equal.
Companies usually compile a trial balance at the end of every fiscal quarter or reporting period. While a trial balance will identify any mathematical mistakes in bookkeeping, it will not necessarily point out other kinds of accounting errors, like omissions or inaccurate classifications.
While a trial balance is limited to checking bookkeeping math, it is useful for guiding an accounting team to find many of the common errors that can surface in bookkeeping.
How Does a Trial Balance Work?
You may be wondering, “What a trial balance is used for?” A trial balance places all of a company or organization’s debits in one column and all of its credits in another. If the totals of each column match one another, then the math is correct. If there is a discrepancy, there is a mistake somewhere in the calculations.
Types of Trial Balances
There are two types or stages of a trial balance: unadjusted and adjusted.
Unadjusted Trial Balance
An unadjusted trial balance is the initial compilation of ledgers as it is first generated. This version of the trial balance still contains any mathematical or clerical errors. The two balances may or may not match.
Adjusted Trial Balance
Once the accounting team has identified and corrected any errors in the trial balance, the totals in each column should match. At this point, the report becomes an adjusted trial balance and is recorded or stored for annual financial records.
How Do You Prepare a Trial Balance in Accounting?
Here are the steps to preparing a trial balance:
- Collect the closing balance of all general ledger accounts. All financial transactions should be posted to the journals and summarized on the ledger statements.
- Ensure that each ledger account is properly balanced. The sum of all credit entries and the sum of all debit entries should match.
- Create a worksheet with eight columns.
- Title the columns as follows: account number, account name, and correlated columns for credit and debit balances.
- Copy the account number, account name, credit balance, and debit balance from each ledger account to the trial balance worksheet.
- Total the amounts in the credit column.
- Total the amounts in the debit column.
- If these two sums are the same, the trial balance is correct.
- Close the trial balance.
- If the two sums do not match, the accounting team will need to identify the errors and correct them.
Several common errors result in a discrepancy between the credit column total and the debit column total:
- Entries that have been omitted
- Entries that have been doubled
- Transposition mistakes
- Entries made on the wrong account
- An incorrect ledger balance transferred to the trial balance worksheet
- An error in calculating an account’s balance
- An entry made in the wrong column (debit in credit column or credit in debit column)
- Posting the wrong amount in the ledger
Two primary methods for preparing the trial balance exist: the total method and the balance method. Under the total method, the debit and credit sides of the ledger accounts are totaled. The sum of the credit side is entered in the credit column. The sum of the debit side is entered in the debit column. The two sums should match.
How Are Accounts Listed in Trial Balance
To help prepare financial statements, trial balance accounts are listed in a particular order:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
Assets and liabilities are listed in order of liquidity, with the most liquid assets first. Liquidity means the speed with which an asset can be turned into cash to cover liabilities. Cash and short-term accounts receivable are considered the most liquid assets.
Example of a Trial Balance
The following columns are included on an initial trial balance report:
- Account number
- Account name
- Ending credit balance
- Ending debit balance
The trial balance lists all accounts that have an ending balance. Most accounting software automatically removes any accounts that have a zero balance so they do not clutter up the worksheet.
Below is an example of a trial balance:
| Unadjusted Trial Balance | Adjusting Entries | Adjusted Trial Balance | |
| Cash | $70,000 | $70,000 | |
| Accounts Receivable | 170,000 | 170,000 | |
| Inventory | 310,000 | 20,000 | 330,000 |
| Fixed Assets (Net) | 200,000 | 200,000 | |
| Accounts Payable | (80,000) | (15,000) | (95,000) |
| Accrued Liabilities | (60,000) | (60,000) | |
| Notes Payable | (430,000) | (5,000) | (435,000) |
| Equity | (330,000) | (330,000) | |
| Revenue | (410,000) | (10,000) | (420,000) |
| Cost of Goods Sold | 280,000 | 3,000 | 283,000 |
| Salaries | 210,000 | 210,000 | |
| Payroll Taxes | 30,000 | 7,000 | 37,000 |
| Rent | 20,000 | 20,000 | |
| Other Expenses | 20,000 | 20,000 | |
| Total | $0 | $0 | $0 |
The Difference Between a Trial Balance and a General Ledger
The primary difference between a trial balance and a general ledger is the amount of detail provided in the report. In a trial balance, only the ending balance of each account is recorded. A general ledger, on the other hand, records each individual transaction that leads to the ending balance.
Because of the level of detail included in general ledgers, they are useful for identifying and rectifying errors that lead to discrepancies on a trial balance.
Conclusion
A trial balance is a useful tool for checking the mathematical accuracy of bookkeeping records. It combines all of a company’s ledgers into simple credit and debit columns. The sums of the two columns should match. Now you should know what the meaning of a trial balance is in accounting. Now when you find an accountant that works for you, you should be able to have a much more knowledgeable conversation about your needs.
While a trial balance cannot identify every possible bookkeeping mistake, it does help notify an accounting team if there is a mistake in their calculations. With this knowledge, accountants can then track down the discrepancy with the use of the much more detailed general ledgers, which record the individual transactions that add up to the final sums that appear on the trial balance.