The financial statements are the most important reports of a business. Due to their importance, we do a final check before preparing the financial statements – we do the trial balance.
A trial is a test. Thus this step is literally a test of balances.
But what balances are we talking about? We’re talking about the closing balances that we worked out for each of the T-accounts (the final amount of each item).
We’re also talking about balancing the accounting equation (i.e. the left side must always equal the right side, as it is an equation).
Let’s see how this works. Here is the trial balance for George’s Catering, as well as the ledger showing each of the T-accounts in our records (note that the bank account excludes the opening balance of $4,300 used in the previous section).
In the trial balance above, the total of the debits is equal to the total of the credits. This makes sense, as we have been doing one debit and one credit for each and every transaction.
Should the debit and credit totals differ in value, then it is certain that there must have been one or more accounting errors. The bookkeeper or accountant would then rectify the errors before preparing the financial statements.
The total of the debit balances agreeing in value with the total of the credit balances does not guarantee that there are zero errors in the accounting records. For example, the bookkeeper could have incorrectly debited the $12,000 to debtors (instead of debiting the baking equipment) and the total of the debit balances would still be $31,500. Nonetheless the trial balance is a useful tool for locating and eradicating accounting errors.
It should also be noted that errors are far less likely to occur with accounting packages as these will take figures from the accounting journals to the accounting ledger and right through to the financial statements with complete accuracy. Thus it can be argued that trial balances are more relevant for manual (hand-drawn) accounting systems, where errors can be made when transferring information through the various steps of the accounting cycle.
A trial balance can be prepared on a weekly, monthly or annual basis, depending on the needs of the business.
That is the last of the lessons on the accounting cycle.
If you feel good at this point, move on to lessons on the financial statements (accounting reports).
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Trial Balance and Financial Statements Exercise
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(Prepare Trial Balance, Income Statement, Balance Sheet Question)
Question 1 1) The following list of balances was extracted from Bamba’s ledger at 31 March 2011. Bamba Trading: 1) Cash in hand 2,100 …
Trial Balance Errors
Q: What are some errors not affecting the trial balance?