What is a Trial Balance?
A trial balance is a critical bookkeeping worksheet where the balances from all ledgers are compiled into debit and credit columns, ensuring they are equal. Prepared regularly, usually at the end of a reporting period, its primary function is to validate the mathematical accuracy of a company’s bookkeeping system. Though termed a ’trial balance’, it does not represent a comprehensive audit.
Key Takeaways
- A trial balance is a worksheet with two columns—one for debits and one for credits—ensuring mathematical correctness in bookkeeping.
- It includes transactions such as assets, expenses, liabilities, and revenues over a specific period.
- Equal debits and credits ensure no mathematical errors, but discrepancies in the accounting system may still exist.
How a Trial Balance Works
Preparing a trial balance helps identify any mathematical errors made in the double-entry accounting system. If debits equal credits, the trial balance is considered balanced, eliminating basic arithmetic mistakes from ledgers. However, errors like misclassified transactions or missing entries can still exist and might not be flagged by just looking at the trial balance.
Requirements for a Trial Balance
Companies record transactions in the general ledger, where accounts may be debited or credited throughout an accounting period. These balances are then summed into a trial balance. Generally, asset, expense, or loss accounts will have a debit balance, while liability, equity, revenue, or gain accounts will typically have a credit balance. The trial balance includes a left column for debits and a right column for credits, with account titles on the far left.
Types of Trial Balance
There are three main types of trial balances:
- The unadjusted trial balance: Prepared before adjusting journal entries.
- The adjusted trial balance: Shows final balances used to prepare financial statements.
- The post-closing trial balance: Displays balances after closing entries, serving as the starting trial balance for the next year.
Trial Balance vs. Balance Sheet
While a trial balance is a less formal internal document used for tracking and balancing, a balance sheet is an official, publicly released document that outlines a company’s assets, liabilities, and equity, requiring auditor validation.
Special Considerations
After listing all ledger accounts and balances on a trial balance worksheet, summing up debits and credits ensures their equality. This balance indicates no mathematical errors in double-entry recording. However, it cannot detect all bookkeeping errors such as misclassifications or omissions.
What is a Trial Balance Used For?
A trial balance helps detect any mathematical errors in a double-entry accounting system. With equal debits and credits, it indicates no arithmetic mistakes in the ledgers.
What Are the Three Trial Balances?
The three types of trial balances are the unadjusted, adjusted, and post-closing trial balance, each used at different accounting cycle stages.
What is Included in a Trial Balance?
A trial balance may include items like assets, liabilities, equity, revenues, expenses, gains, and losses to help track financial position.
The Bottom Line
A trial balance is a two-column worksheet ensuring mathematical correctness in bookkeeping by summing debits and credits from various accounts. While it minimizes arithmetic errors, some accounting mistakes could still go unnoticed. A trial balance can effectively gauge a company’s financial health between annual audits.
Related Terms: Ledger, Double Entry, Balance Sheet, General Ledger, Accounting Errors.
References
- Ohio University, Online Master’s Degree Programs. “What Is a Trial Balance?”
