3 6: Prepare a Trial Balance Business LibreTexts

According to the Total Method, the sum of debits and credits of every account is shown in the trial balance, i.e. both debit and credit totals are recorded in the trial balance. On the other hand, according to the Balance Method, only the Net balance which is the difference between credit and debit total is transferred and recorded. A trial balance is the accounting equation of our business laid out in detail. It has our assets, expenses and drawings on the left (the debit side) and our liabilities, revenue and owner’s equity on the right (the credit side).

• The difference between the two is that when preparing the trial balance, it is the balance brought down (bal b/d) which matters.
• In the credit column of trial balance, we will write all the liability ledger account’s balance and income and gain account balance.
• If they are not, it will be immediately apparent and can help to diagnose where the error might have occurred.
• An unadjusted trial balance can be balanced even if there are errors in the bookkeeping process, such as incorrect journal entries or incorrect account debits and credits.
• Here, the debit and credit balances are posted separately and balanced, which also helps in rectifying errors.
• Accounts Payable ($3500), Unearned Revenue ($4000), Share Capital ($20000) and Revenue ($5500) all have credit final balances in their T-accounts.

It is prepared towards the end of a financial year to draw financial statements like profit and loss accounts and balance sheets. Thus, preparing a trial balance is the first step in closing the financial books of an accounting period. An unadjusted trial balance is usually the third step in the accounting cycle and is prepared before any adjusting entries are made. It is a report that lists the balances of all the individual t-accounts of the general ledger at a specific point in time. This is perhaps one of the simplest steps of the accounting cycle as it just requires the bookkeeper to compile the separate balances in one report.

Who uses a trial balance?

Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. Each trial balance will follow the same format as above, but they are used in slightly different circumstances. If they are not, your trial balance will serve as a red flag to indicate that something is wrong with your books, allowing what exactly is accounting you the chance to fix them. A tool for detecting errors-this is the parameter that is used to detect errors occurring in the course of the financial period. Although not all errors will be detected, it to some extent used as a tool to identify errors of a certain category. The computer and bank loan accounts have single entries on one side, like the furniture account, so they need to be treated in the same way.

Business owners may also choose to prepare a trial balance in the middle of a standard reporting period to assess financial position and ensure that accounting systems are on track. Compare the total values to determine whether your balances are equal. This means you don’t need to adjust anything with your trial balance.

Compare your debit and credit totals

Preparing a trial balance is the fourth step in the accounting cycle. As discussed in the previous section, a trial balance is a list of all accounts in the general ledger that have balances. Preparing a trial balance is an important step in the accounting process, because it helps identify any computational errors throughout the first three steps in the cycle. Main purpose of making trial balance is to check the accuracy of ledger accounts.

Next, you’ll transfer the closing balances from your ledger to your trial balance. Make sure that the accounts listed on your trial balance are the same as on your general ledger. Limitations aside, a trial balance can still be a valuable tool for evaluating your company’s finances, and it can be helpful when you examine your company’s financial statements.

What are the three main uses of a trial balance?

Start by looking at your accounts receivable and inventory entries. To create a trial balance, you need your general ledger information. In an error-free trial balance, these two summations would be equal. However, trial balances are mostly prepared at the end of an accounting period. It can be prepared at any time—whenever it is desired—to check the arithmetical accuracy of the books of accounts.

• Again, prepare trial balances when closing your books for a period (e.g., a month).
• Though it is not conclusive proof of the correctness of all books of accounts because there can be some errors despite the fact that the total of both sides of the trial balance is matching.
• This check might reveal a basic manual data entry mistake or entries made in the wrong column or account.

Figure 1 below shows the general ledger and the three categories of T-accounts therein that we have discussed so far. The way a balance is transferred to either debit or credit side of a trial balance depends on the nature of that account, below is the table showing the relationship between types of accounts and their usual balances. It helps in referring to the ledger only during the requirement of more details in respect of an account.

Put together your trial balance worksheet

In order to prevent errors and to make sure that all transactions are properly recorded as debits and credits in the correct T-accounts, a checking procedure takes place at the end of each accounting period. A trial balance is thus a list of all the debit and credit balances in the general ledger accounts. If all the individual double entries have been correctly carried out, the total of the debit balances should always equal the total of the credit balances in the trial balance.

The reason for the learner or entrepreneur to be careful is that there is no account known as bank overdraft a/c. So many are the times one may be tempted to open such an account which is not correct according to accounting practices. The above account has a total DR balance of 6,800 made up of cash, bank and discount received while the CR side has a similar total of 6,800 made up of b/f of 2,300 and purchases of 4,500. Making a list of the above balances brought down produces a trial balance as follows. Trial balance is a statement that helps in locating errors related to bookkeeping.

The brought down balances at the end of the accounting period will be the opening balances of the next accounting period. The Trial Balance is, as the name suggests, is a table where we lay out all our debit accounts and all our credit accounts to see if they balance or not. If the two numbers are unequal, you have an unbalanced trial balance. Prepare a four-column worksheet referring to the trial balance format. Save the document itself, which can be helpful if you need to perform the process again for a longer period. Once you discover your error, repeat steps three through five to see whether your numbers now match.

Again, this is simply a sum of all the debits of your accounts for that period. This is where you can make the mistake of recording items in the wrong column or even the wrong account. This will significantly alter the accuracy of your completed trial balance and cost you valuable time chasing down your mistake. The capital of a business is the value of the investment in the business by the owner(s). As you learned in Activity 3 in Week 1, if a business makes a profit, the value of the investment by the owner (capital) increases.