A trial balance is a list of debits and credit items (assets/liabilities/income/expenses) extracted from the closing balance in each account of the general ledger. This type of report is generated in a double-entry account format before the finalization of the balance sheet on a certain date, usually at the end of an accounting period.
There are three types of trial balance: the unadjusted trial balance, the adjusted trial balance, and the post-closing trial balance. Each is used at different stages in the accounting cycle.
The trial balance taken the first time is called an unadjusted trial balance. Whenever totals of debits and credits side mismatches in the unadjusted trial balance, concerned persons on the job will search for and correct the irregularity. Such a corrected statement is known as an ‘adjusted trial balance’. Once the adjusted trial balance is saved/ printed, the closing balances of revenue-related accounts (like interest received, the commission received, discount received, salary paid, premises rent paid, telephone bill paid, electric bill paid, traveling expenses, stationery expenses, postage expenses, etc.) of the reporting financial year will be journalized and transferred to the ‘Profit and loss account’ (also known as ‘Retain earning account’). Once the balance of the above types of accounts is closed and moved to the profit and loss account, only permanent accounts that have balance in them will continue in the books of accounts and the same will be balanced again under the double entry system. This balanced list of permanent accounts is called the post-closing trial balance. As mentioned above, the post-closing trial balance does not show balance in any of the income account or expenses accounts, since these temporary accounts have already been closed and their balances moved into the profit and loss account as part of the closing process.
The trial balance report is primarily generated to find out whether the total debit balances are equal to the total credit balances to generate an accurate financial statement. If there is any disagreement between the total of debits and the total of credits, then it means the existence of the error. When a total of debits and credits match with each other it means there are no unbalanced journal entries. However, we have to remember that trial balance may not always give you the perfect ground for finalization of the balance sheet. Even when the total debit entries of the trial balance agree with the total credit entries, it does not mean that books of accounts are perfectly tallied. The trial balance may still show a perfect match between total debits and credits even when certain entries are wrongly classified and posted in the wrong heads of account certain transaction/s might have been omitted to record during the period or off-setting errors of debits and credits are simultaneously made. In such events, errors would not be easily identified by the trial balance procedure.
To prepare a trial balance we need the closing balances of all the ledger accounts and the cash book as well as the bank book. So firstly every ledger account must be balanced. Balancing is the difference between the sum of all the debit entries and the sum of all the credit entries.
Then prepare a three-column worksheet. One column for the account name and the corresponding columns for debit and credit balances.
Fill out the account name and the balance of such account in the appropriate debit or credit column
Then we total both the debit column and the credit column. Ideally, in a balanced error-free Trial balance these totals should be the same
Once you compare the totals and the totals are the same you close the trial balance. If there is a difference we try and find and rectify errors.
Some common errors include the following:
- It may be a totaling error in the debit and credit balances in the trial balance.
- It may be a total error in the subsidiary books.
- It may be a posting error in the total of subsidiary books.
- It may be the error in showing account balances in the wrong column of the trial balance, or the wrong amount.
- It can be an omission in showing an account balance in the trial balance.
- It can be an error in the calculation of a ledger account balance.
- It may be the error while posting a journal entry: a journal entry may not have been posted properly to the ledger, i.e., a posting made either with the wrong amount on the wrong side of the account or in the wrong account.
- It may be an error in recording a transaction in the journal: making a reverse entry, i.e., the account to be debited is credited and the amount to be credited is debited, or an entry with the wrong amount.
- It may be the error in recording a transaction in a subsidiary book with the wrong name or the wrong amount. Keeping in view the nature of errors, all the errors can be classified into the following four categories:
- Errors of Commission • Errors of Omission• Errors of Principle • Compensating Errors
Originally posted on 27.10.2017 edited on 27.10.2024
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