Preparation of Trial Balance

A trial balance is an internal financial report that lists all the balances of general ledger accounts of an entity at a specific time. The items reflected in the trial balance include assets, liabilities, equity, revenues, expenses, gains, and losses. It’s usually prepared at the end of the accounting year to ensure the bookkeeping system’s entries are accurate. A trial balance compares the total debits and credits in a company’s ledgers to ensure they are equal. Discrepancies indicate mathematical errors that need to be investigated and corrected to help prepare a final balance sheet.

A trial balance is prepared to ensure that an entity’s bookkeeping system is mathematically correct and to help prepare financial statements like the balance sheet, income statement, and cash flow statement. To prepare a trial balance, we need to calculate the balances for each ledger account and record the debit and credit balances in the trial balance. When all the entries are made on the debit and credit sides, calculate the total for the credit and debit columns and compare the totals of both sides.  In case the total doesn’t match, we need to investigate the reasons for discrepancies.

Some of the mistakes take place due to the following reasons:

Errors in a trial balance can occur at various stages of the accounting process like incorrect totaling of debit/credit side, posting mistake from journal to ledge, incorrect carrying from ledger to trial balance, recording in the wrong account or with the wrong amount, a transaction may be omitted from the books of accounts, etc.  Such error (or errors) needs to be located and corrected before preparing the financial statements.

When two or more errors are committed so that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Compensating errors are also known as equalizing errors because the trial balance will always be tallied and does not have any difference. They can be misleading because a compensating error is an accounting error that offsets another accounting error, resulting in no net impact on an organization’s financial statements.

Some complications in finding out mistakes in a trial balance:

It can’t detect errors of omission, such as when a transaction is forgotten or not recorded. It can’t detect errors if the same journal entry is recorded with an incorrect amount in both accounts. It can’t detect errors if an accountant enters a journal entry with the correct amount but under the wrong accounting head.

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