Overview:

Trial Balance is the statement or the record that lists down all of the closing account ledgers of the entity for a specific period of time. Those ledgers present in debit or credit based on the nature of accounts.

Trial balance is normally prepared in five columns but sometimes in four, and it is used to prepare an entity’s draft Financial Statements.

The company’s financial statements are preparing in many different stages, from the primary records in sales daybooks and purchase day books.. to the general ledger, then to trial balance, and finally producing the draft financial statements.

This is how the manual preparation of financial statements is performed. However, for the entity to use an accounting system like QuickBooks to records its financial transactions, all of these statements will be automatically prepared and ready for use.

The accountant needs to enter the accounting transactions correctly into the system, and then the statements are ready for use.

Definition:

Trial balance is the records of the entity’s closing ledgers for a specific period of time. Normally, the entity records its daily business transactions in general ledgers.

At the end of the period, the ledgers are closed and then move all of the closing balance items into trial balance. The zero items are not usually included.

The trial balance could help ensure that the entries made during the period or year are mathematically correct. It is mathematically corrected. Only the debit and credit balance of the statement is reconciled.

In general, the ledgers listed down in the trial balance range from balance sheet items to income statement items. For the balance sheet items, assets items are range first and followed by liabilities and equities items. For the income statement items, revenues items are ranging above the expenses items. You can double-check this if you extract the TB from the accounting system.

If the total balance of debit and credit are not reconciled, then you need to review the double entities that record in the general ledger.

It is important to note that the unadjusted and adjusted trial balance is not the financial statements. It is the records used to prepare the drafting financial statements and double-checks the mathematical accuracy of ledgers.

This statement could not be used for presenting financial information to management or report to relevant stakeholders.

Here is the visual flow chart to help your understanding,

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Trail Balance Process Flow

Tips: Before preparing the Financial Statements, the bookkeeper has to ensure that the total credit balance and debit balance in the TB is reconciled.

If it doesn’t, the Bookkeeper should review the general ledgers again. Some of the recording transactions might be incorrect records, omission, or double records.

Purpose:

At the end of the period, the accountant normally needs to prepare the financial statements and other related financial reports for management use.

The accountant needs to make sure that the ledgers are correctly records according to the accounting equation so that the financial statements are mathematically correct. This is one of the reasons why the accountant needs to prepare a trial balance.

In short, the trial balance is prepared to identify and detect errors that record general ledgers. It is also used as a working paper for accountants and auditors in drafting financial statements.

As mentioned above, if the total balance of the debit side is not equal to the credit side, that means the accounting entry is not mathematically correct. In this case, the accountant needs to double-check his accounting entries and classification.

Maybe the specific transaction amount is not equally entered between the debit side and the credit side. Or maybe the classification is not correctly classified concerning the accounting equation.

Limitations:

Even Trail Balance is great for general ledger arithmetical checks and produces financial statements, yet TB is still limited for certain areas. The following are the limitation of Trial Balance.

  • Could not detect the original error: For example, if the original amount of a transaction is supposed to be $1,000 but the entry in general ledgers is $10,000 on both sides. The financial statements will then incorrectly produce by overstating or understate $9,000.
  • On the same example, if 10,000 have been deleted from both accounts, the trial balance still reconciles. In other words, the elimination of events or transactions could not be identified.
  • If the Bookkeeper books the amount correctly, the transaction that was supposed to be booked in Debit was incorrectly booked in Credit, and the account that was supposed to be booked in Credit was booked in debit. In this case, TB will equally affect by the same amount, and it will reconcile. In other words, the error still could not be identified.
  • What if the bookkeeper booked a twist or three times the same transaction? The debit and credit will equally affect, and the error also cannot identify.
  • TB also could not detect the error of the accounting principle. For example, bookkeepers are supposed to book debits in a Cash account, but they booked in the advance account under the same class. These two accounts are in Assets, and they still make Trial Balance correctly reconciled.
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Example:

The following is the example of trial balance:

How to Prepare Trial Balance?

Preparing the trial balance is the initial works of the financial reporting process because these statements could assist the accountant in drafting the report easily and mathematically correct. The following are the three simple steps that you can use to prepare BT at the end of your organization.

In case you are using the accounting system to record your entity’s financial information, TB is already automatically preparing for you. All you need to do is extract it into the spreadsheet format and then start drafting financial statements.

First Step:

Close all General Ledger accounts that you have. This is the first thing you need to do. For example, per your chart of accounts, you have 100 ledgers, and all you need to do is close all of those accounts. For example, the salaries expenses account is closed, and the total amount will use in the second step.

Closing the mean balancing the debit and credit amount of Salaries Expenses. Salaries expenses are initially records on the debit side in the T account, and the balancing amount would be on the credit side. This will then carry into the debit side of the trial balance.

Follow this step to close all of the accounts in the ledger. Remember, assets and expenses accounts are reporting on the debit side of TB. And revenues, liabilities, and equities accounts are on the credit side of TB.

Second Step:

Once you complete closing all General Ledger, all you need to do is transfer the carrying forward balance to trial balance. If the closing balance per general ledger is at debit, then post in a credit of TB.

As per the example above, the assets items record at the top and then followed by liabilities, equity, revenues, and expenses.

This structure could help both accountants and auditors who use TB to draft financial statements to easily identify which items are assets and which items are liabilities, and so on.

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Once you complete the movement from general ledger to trial balance, the next step you need to do is start reconciling the TB.

Third step:

In this step, you need to reconcile the balance in credit and debit of your trial balance. If there is a difference between debit and credit, you need to double-check with the accounting entry in the general ledger.

The difference mainly because of inputting the difference amount of the same transactions in debit and credit. Duplicating and eliminating would not make a difference.

This is the final stage of preparing the trial balance, and you can start drafting your financial statements. However, you can scan through the entire TB to ensure that the numbers of items are the same as your understanding. Just in case the mistakes occur since the entry in the ledgers, and you cannot detect them at that time.

What is Unadjusted Trial Balance?

Unadjusted trial balance is the list of the general ledgers for the specific period before making any adjustments.

This statement is normally prepared in four columns. The adjusting entity will be made when the accountant or auditor reviews the accounting records and notes that numbers adjustment is necessary to do accounting records true and fair review.

In the accounting system, there are no adjusting entries. All the adjustments that make into the system will automatically affect the trial balance.

However, the accountant or auditor might extract the TB into the spreadsheet to draft the financial statements. Once there is an adjustment required, they will initially adjust in excel first to see how it affects the financial statements.

If the adjustment is approved, then they will post into the system subsequently.

What is an Adjusted Trial Balance?

The Adjusted Trial Balance is the statement that listed down all the general ledgers after making the adjustments. This is the final trial balance that use to prepare the financial statements.

This statement is sometimes print out with the financial statements and sometimes not. It depends on the company’s practice. In most cases, we use only one template to prepare the trial balance by including both unadjusted and adjusted trial balance.

Sometimes it is prepared separately. Before preparing the financial statements, it is good to have an overall review of the trial balance.

This is to make sure that the numbers of items are consistent with our understanding.