What is a Trial Balance?
A trial balance is a report that shows the balances of all of a company’s general ledger accounts at a specific point in time. A trial balance includes accounts for all major accounting items, such as assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to determine the balance of debits and credits entries from the general ledger transactions at a given point in time.
The trial balance is prepared to make the necessary adjusting entries to the general ledger in addition to detecting errors. It is recalculated after the adjusting entries have been posted to ensure that the total debits and credits remain balanced. It isn’t a legally binding financial statement. It’s usually only used within the company and isn’t shared with anyone else.
What Does a Trial Balance Include?
The totals of all general ledger accounts are listed in a trial balance. Each account should have a unique account number, account description, and final debit/credit balance. It should also include the end date of the accounting period for which the report is being prepared. The main distinction between the trial balance and the general ledger is that the general ledger displays all transactions by account, whereas the trial balance only displays account totals, not individual transactions.
Finally, adjusting entries must be reflected on a trial balance if they were made. It should display the figures prior to the adjustment, the adjusting entry, and the balances after the adjustment in this case.
How a Trial Balance Works
The purpose of preparing a trial balance for a business is to detect any mathematical errors in the double-entry accounting system. The trial balance is considered balanced if the total debits equal the total credits, and there should be no mathematical errors in the ledgers. However, this does not rule out the possibility of accounting system errors. For example, improperly classified transactions or those that are simply missing from the system could still be material accounting errors that the trial balance procedure would miss.
- A trial balance is a worksheet with two columns, one for debits and the other for credits, that ensures that a company’s accounting is mathematically correct.
- All business transactions for a company over a given period are included in the debits and credits, which include the sum of such accounts as assets, expenses, liabilities, and revenues.
- There are no mathematical errors if the debits and credits of a trial balance are equal, but there may still be mistakes or errors in the accounting systems.
Before preparing the company’s final accounts, it is common practise to prepare a trial balance. Internal control is based on the maker and checker principle. Because final accounts take time to prepare, management can get a sense of the company’s financial situation by looking at the trial balance until the final accounts are ready. They can make business decisions based on the most recent trial balance. Don’t forget to view Business Guest Blogs list on IBlogger.