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):
The trial balance is drawn up to check for any mathematical errors that may have occurred during the earlier stages of the accounting cycle - during the recording of the journal entries and their posting to the various accounts.
The trial balance is usually prepared on an annual basis, in line with (and just before) the financial statements. However, it can be prepared on a more frequent basis, depending on the needs of the business.
Trial Balance Format
The trial balance has a simple format:
We list all the accounts from the general ledger on the left-hand side.
On the right-side of the report we show two columns, a column for debits and a column for credits.
At the bottom of each of the debit and credit columns are the totals.
An additional column showing the folio or code of each general ledger account can also be included.
Trial Balance Example
Let’s see how this works.
Here is the general ledger for the sample business we've been using throughout our lessons, George’s Catering, showing each of the T-accounts in our records:
When drawing up the trial balance, we're going to take each of the closing balances of the accounts above and list them out together with a column for debits and a column for credits.
Before going any further, try to draw up the trial balance for George's Catering on your own using the T-accounts shown above. When you're done, check your answer against the solution just below...
In the trial balance example above, the total of the debits is equal to the total of the credits. This is how it should be.
And it makes sense, since we've been recording one debit and one credit for each and every transaction.
Trial Balance Errors
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 need to find and rectify the errors before preparing the financial statements.
But actually, even if the total of the debit balances agrees in value with the total of the credit balances, it still 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 to the baking equipment account. In this situation 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.
Unadjusted and Adjusted Trial Balances
There are different terms used to describe the trial balance at different points in time.
The first trial balance (before any end-of-year corrections and adjustments are made) is called the unadjusted trial balance.
The next thing that happens is that any errors identified are corrected, and other adjustments are made to ensure the record-keeping is in line with accounting standards.
At this point the trial balance is known as the adjusted trial balance and the financial statementsare prepared.
After the closing entries are done and the year is over, we call the trial balance the post-closing trial balance.
As previously mentioned, errors are far less likely to occur with computerized accounting packages as these automatically take figures from the accounting journals to the 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.
The trial balance is less important if you use an accounting package.
That's it for our lesson on What is the Trial Balance?
You just completed the last of the lessons in our section on the accounting cycle.