What is a trial balance?
What is a trial balance?
Have you heard your Accountant or Bookkeeper talking about a trial balance, and not sure what they mean? Here we explain what this is, and why it is so important to your business.
Understanding the trial balance
A trial balance is a report from your accounting software that shows the total of all your business's accounts: its assets, liabilities, income, costs and capital, at a specific point in time.
The trial balance report stands as a base document, offering a snapshot of a company’s financial health at a given point. For both accountants and business owners the trial balance is an important report, providing insights into the account balances as well as ensuring accuracy in the financial statements.
Accountants use trial balance reports from your accounting software (we love Xero!) and worksheets for a reporting period to determine whether the debits and credits within the general ledger are in balance.
One key way to make sure your business’s financial records are on the right track, is running and analysing your trial balance report.
Although using a trial balance can help detect accounting errors, some financial statement errors or omissions may not be prevented simply by using a trial balance. You need to analyse and understand what it is telling you on a regular basis.
Here’s everything you need to about the trial balance meaning in accounting, including its purpose and correct format.
So what is a trial balance?
A trial balance is used in bookkeeping to list all the account balances in your business’s general ledger accounts. It consists of two columns: one for debit balances, and one for credit balances.
To keep the books balanced, the total of each column should be equal. If it isn’t, then something has gone wrong!
Your business’s trial balance gives you a simple way to check that every transaction includes a debit and corresponding credit. This gives you the fundamental basis of your balance sheet, as well as your profit and loss account.
You can prepare your trial balance at regular intervals – eg when preparing your monthly or quarterly management accounts - to make sure your books are balanced. Many organisations use trial balance accounting at the end of each reporting period, such as the financial year end.
When looking at the trial balance meaning, it’s helpful to define what would go into each side of the equation.
Debit balances include asset, expense and drawings accounts.
Credit balances include capital, liabilities, and income accounts.
Together, you’ll see the usual trial balance format of two columns contained in a single working paper file.
Types of Trial Balance
There are three main types of trial balance:
The unadjusted trial balance
The adjusted trial balance
The post-closing trial balance
An initial trial balance report is called an unadjusted trial balance. The unadjusted trial balance is the preliminary trial balance report or document that lists all ending balances or totals of accounts to determine if total debits and credit balances for account totals in the general ledger are equal. The trial balance includes balance sheet and income statement accounts. The trial balance is prepared after the subsidiary journals and journal entries have been posted to the general ledger.
After the preliminary Unadjusted Trial Balance, also known as the Trial Balance, is prepared, accountants review it and determine if corrections are required for determining adjusted balances.
After adjustments have been made to correct any errors, we then call this an adjusted trial balance and is used to prepare other financial statements such as your balance sheet, profit and loss or cashflow. The Adjusted Trial Balance is a second type of trial balance, set up like a worksheet, that includes debit and credit columns for each category: Unadjusted Trial Balance, Adjusting Entries, and Adjusted Trial Balance. Adjusting entries will include debit entries and credit entries. The total of the debits and credits should be equal if the books are in balance.
The post-closing trial balance shows the balances after the closing entries have been completed. This is your starting trial balance for the next financial year. After making any required adjustments and closing entries in the accounting records, the trial balance is run again as the Post-closing Trial Balance to ensure that debits and credits are in balance and the financial statement reports can be prepared.
What is the purpose of the trial balance?
The purpose of your trial balance is to aid in the creation of the financial statements for the company; preparing the trial balance is the first step when preparing official financial statements.
It’s a work in progress to verify your credits and debits. The trial balance is primarily used as part of the double-entry accounting system. By checking that your debits and credits are equal, you can pick up on any mathematical errors. Total debits should equal total credits for the trial balance to be correct. If there are any discrepancies in the totals, you can investigate these problems before they’re recorded on the official financial statements.
It’s important to note, however, that although performing trial balance accounting can highlight simple mathematical errors, it won’t reveal every problem in your books. Missing transactions or classification errors can occur even when recording the trial balance. The trial balance is also not an official financial statement and is only used internally.
Does a Business Have to Use a Trial Balance?
No, a business doesn’t need to use a trial balance, but it should do – especially as running it from your accounting software is simple and easy. A trial balance can help your business detect some types of errors and make adjustments to the trial balance and accounting ledgers before the accounts are closed for the accounting period and financial statements are prepared.
You need to rerun the trial balance after making any adjusting entries and again after making closing entries at the year end.
What is included in a trial balance?
It depends. Companies can use a trial balance to keep track of their financial position, and so they may prepare several different types of trial balance throughout the financial year. A trial balance may contain all the major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses.
Is a Trial Balance the Same as a Balance Sheet?
In short, no! These are not the same things.
The key difference between a trial balance and a balance sheet is that a balance sheet records not only the closing balances of accounts within a company but also the assets, liabilities, and equity of the company. It is usually released to the public in your annual accounts, rather than just being used internally.
A trial balance is a less formal document, used as a basis for your financial statements. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them. A trial balance is often used as a tool to keep track of a company’s finances throughout the year, whereas a balance sheet is a legal statement of the financial position of a company at the end of a financial year.
What are the Benefits of Using a Trial Balance?
The benefits of using a trial balance are:
01
- Ensuring total debit account balances equal total credit account balance amounts as a mathematical proof test
02
- Reviewing account balances as a list with account numbers/descriptions and debit and credit column totals that should be equal, as grand totals
03
- Increasing financial statement accuracy
04
- Having the ability to investigate and correct errors before closing the books if debits don’t initially equal credits or for other reasons
Key Points to Remember
- A trial balance is a worksheet with two columns, one for debits and one for credits, that ensures a company’s bookkeeping is mathematically correct.
- The debits and credits include all business transactions for a company over a certain period, including the sum of such accounts as assets, expenses, liabilities, and revenues.
- Debits and credits of a trial balance must tally to ensure that there are no mathematical errors, but there could still be mistakes or errors in the accounting systems.
How we can help
Bright Beany Accounting will manage your Accounting Software and prep your monthly or quarterly management accounts, including your trial balance. At year end, we will prepare your Annual Accounts and Corporation Tax Return, the basis for which is your trial balance.
Bright Beany Accounting can assist with your bookkeeping - if you feel like you can save your business money by doing everything yourself – think again. Your business’ most valuable asset is you and your time. So free up that time to dedicate to growing your business, and leave the bookkeeping to us.
Bookkeeping with Bright Beany is about more than just reconciling your bank account. It is making sure that you’re budgeting for tax and VAT payments, that you know who you owe money to and that you have a process in place for chasing payments owed to you.
The saving will come with reduced risk of error, no missed deadlines or payments and our years of experience doing this. This gives you the headline numbers and the clarity to enable you to make the right business decisions. It’s our job to get your books right, and keep them that way.
We can provide a range of bookkeeping services using digital accountancy software, which removes any manual record keeping.
This gives you time back for either your business, or your home and if you want a bit more support, you can always look at adding management accounts to your package too.
