In a trial balance, the report of the ending balances of different ledgers of a particular company are available. It is the first statement you will need to prepare as an accountant to check the correctness of the double entry of any business accounts. To ensure that the accounts of a business are correct, having good knowledge of trial balance is necessary. Basically, with the help of trial balance you can minimize the errors in the company’s financial statements.
In this article, you will learn about wha trial balance is, and what are its constituents. Apart from that, you will also learn how a trial balance works in general. Next, we will show a step-by-step procedure of how to prepare a trial balance with respect to your company’s financial statements. Finally, you will learn some rules to follow while preparing a trial balance. Hence, to learn more, read on through to the end of the article.
What Is Trial Balance? – Definition
According to Investopedia,
“A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct.”
The trial balance basically consists of the test of the fundamental aspect of a set of accounting records (that is debit and credit). Only after the trial balance process, you will be able to move to more complex and detailed analyses.
How Does Trial Balance Work?
Basically, the trial balance is a tool that you, as an accountant, is using to check the accuracy of the general accountant ledger. Apart from that, it also helps you to ensure that the errors in the financial statement are minimal. The internal financial reports through the trial balance can help you to verify the double-entry accounting system’s accuracy. In addition to that, you can also identify eros before the issuing of the critical external financial statements.
The Wall Street Mojo adds here –
“Trial Balance is the report of accounting in which ending balances of the different general ledgers of the company are available; For example, utility expenses during a period include the payments of four different bills amounting to $ 1,000, $ 3,000, $ 2,500, and $ 1,500, so in the trial balance, single utility expenses account will be shown with the total of all expenses amounting $ 8,000.”
How To Prepare A Trial Balance?
In general, accountants create a trial balance manually. However, with the coming of various accounting software systems, accountants use them as well, when it comes to several transactions and investments. If you want to prepare a trial balance, make sure to take the following steps:
1. Make Sure to Balance The Ledger Accounts
Here, you will need to record all your transactions as journal entries, and make entries in respective ledger accounts. Then, calculate the closing balances of each ledger account. You will have to take these to the trial balance.
2. Prepare A Worksheet
Create three separate columns – one to contain the names of each ledger account, one for debit balances, and the last one for credit balances. You can also optionally enter account numbers and other details.
3. Complete The Worksheet
In the worksheet, fill the names of each account that you are loading in the worksheet. Apart from that, enter the total debits and credits for each ledger account for the accounting period. Make sure all the information is correct.
4. Add Values In The Columns
After you have filled up both the columns, you should add up the values in each column to find the total in each case. If the ledgers are correct, then the totals of both the columns should be equal.
5. Close The Trial Balance
If the values in both the credit and debit column are equal, you can close the trial balance. If they are not equal, consider finding the common errors, and rectify them.
Preparing A Trial Balance – A Few Things To Consider
According to Indeed.com,
“While computing the trial balance, you input the balances of these ledgers into debit or credit account lists in separate columns. It is necessary that the total amount in each column is equal. To ensure that bookkeeping entries are continuously correct and balanced, businesses typically perform trial balances at the end of each accounting period.”
Here are a few rules to consider if you are preparing a trial balance so as to avoid any errors:
- Make sure all the liabilities are in the credit column and all assets are in the debit column.
- Make sure the gains and revenues are on the credit side of the balance.
- The losses and expenses for the investment should go on the debit side of the balance.
- While preparing the trial balance, make sure to consider the nominal, personal, and real accounts.
- If a ledger shows zero balance, avoid it.
- Include the opening stock figure in the profit and loss account.
- You can show the sales and returns in two ways. The first way is to show them as reductions from the original purchase and sales ledger. The second way is to show them as separate line items in the trial balance.
- At the end of the trial balance, the debit and credit balance need to be identical.
Hope this article was helpful for you in getting an idea of what trial balance is, and how it works. It is basically a worksheet where you will get two columns – one for credit and the other for debit. By matching the balances of these two columns, you can ensure that your company’s bookkeeping is mathematically correct. The debits and credits are the company’s transactions.
All the debits and credits of the company over a given time must tally so as to ensure that there is no error in calculation. However, there could still be mistakes or errors in the accounting system. Do you have any suggestions for preparing a trial balance report? Share your ideas and info with us in the comments section below.