What is a Trial Balance?
A trial balance is an organisation’s internal business report that provides information on the net balance of every general ledger account. It shows the aggregate of business accounts, income, assets, liabilities, and costs and capital. It must be noted that a trial balance report does not have to be sent to Companies House or Her Majesty’s Revenue and Customs (HMRC) – the report is consumed by the business for internal use only. In order to comprehend a trial balance, let’s first understand the below mentioned:
- Double-Entry System: Transactions are recorded twice for a single business deal.
- Journal: All dealings are reported in double entry structure of accounting.
- Ledger: Summary of journals entries
Let’s assume a business purchases goods worth £1,000 on credit. Once the product has been received by the business, and the payment is due, then the recorded transaction will be:
|To Creditor A/C||£1,000|
The trial balance for the above stated transaction will be:
|Particular||Debit (£)||Credit (£)|
The prime objective of preparing a trial balance is to make certain that the credit total is always equivalent to the debit total. This makes certain that each journal entry is well-adjusted and makes it stress-free to produce precise financial reports at the end of every accounting period. In case the trial balance report identifies any inconsistency amongst the total debit and total credit, these variances can be examined and fixed before generating financial statements. If errors are not identified prior to generating financial records, it can be much more complex and laborious to fix any errors.
You can refer through below video – How to manage Trial Balance in Nomisma Bookkeeping Software?
What is the difference between an Unadjusted Trial Balance and an Adjusted Trial Balance?
The variance between an adjusted trial balance and an unadjusted trial balance are the totals noted down as part of the amending entries. Adjusting entries comprise the accumulation of income that was received but have not been recorded, and the accumulation of expenditure that was incurred but have not yet been recorded. Accrued expenditure and the associated accountabilities often encompass commissions, interest, wages, repairs and maintenance, utilities, and more. Adjusting entries also comprise depreciation and the deferment of or a correction of advance payment comprising customer deposits, unearned revenues, prepaid insurance, and more.
What is the procedure for preparing a Trial Balance?
In order to prepare a trial balance, an organisation must list all the account titles in the general ledger that have outstanding dues. In the two columns, one titled ‘debit’ and the other titled ‘credit’, the amount for each account must be entered – balance of each account is listed in the suitable column. Post entering all the account balances, each column is added to check if the debit total is the same as the credit total. Nowadays, an accounting software has disregarded the scope for clerical errors. Hence, Trial balance does not play a significant role as it did many years ago.
What is a Post-Closing Trial Balance?
A post-closing trial balance is prepared once all the provisional accounts in the general ledger have been locked. The temporary accounts consist of:
- An income statement accounts comprising of expense, revenue, gain, and loss accounts
- Summary accounts
- Temporary balance sheet interpretations such as corporation’s dividend account or sole proprietor’s drawing account
Today’s accounting software will, by default, produce a post-closing trial balance.
Format of a Trial Balance Report
A trial balance report encompasses four columns:
- Name of the account
- Account number
- Closing debit balance (if pertinent)
- Closing credit balance (if pertinent)
The closing balance and name of every nominal ledger account is recorded in the trial balance under the above mentioned four columns. By and large, losses, expenses, and assets are documented as debit entries, whereas income, capital, and liabilities are documented as credit entries. If accounts have been updated appropriately, the over-all debit balance should be equal to the total credit balance.
Advantages of Trial Balance
- Numerical accurateness – As per the structure of double entry system, each business details recorded twice, hence, at any given time all debit records must be equivalent to credit ledger totals. For that reason, a trial balance depicts the numerical accurateness of the books of accounts. However, with accounting/bookkeeping activities being performed on a software, this advantage is not very pertinent – the data entry system does not permit records to be posted if there is a variance in the credit and debit amount,henceforth, leaving no room for miscalculation
- Bird-eye view – Since, a trial balance provides a summary of all balances, therefore, it offers a bird-eye observation of the bookkeeping transactions of an association.
- Essential for preparing financial statements -It is imperative for an organisation to know earnings or loss to analyse the financial position during a fiscal or calendar year – to prepare financial reports, trial balance is essential. All shareholders also require this data. It is the main step in the direction of closure of financial records for a specific period.
Uses of Trial Balance
- Straightforwardness of posting adjustments – A matched trial balance provides noteworthy ease concerning correctness.
- Supports in audit – Trial Balance provides a list of all ledger entries with balances. For an audit’s purpose, a trial balance is analysed. Hence, trial balance is also an imperative tool for auditors.
- Defines credibility – Trial Balance is also used by lending agencies to comprehend the borrowing capacity and credibility of a corporation
Example of Trial balance –
General Ledger Balance
|Cash in checking||£0.00|
|Cash in savings||£0.00|
|Reserve for bad debts||£0.00|
|Prepaid other expenses||£0.00|
|Accumulated depreciation – vehicles||£0.00|
|Furniture and fixtures||£0.00|
|Accumulated depreciation – furniture and fixtures||£0.00|
|Accumulated depreciation – equipment||£0.00|
|Accumulated depreciation – buildings||£0.00|
|Other intangible assets||£0.00|
|Sales tax payable||£0.00|
|Federal withholding taxes payable||£0.00|
|FICA taxes payable||£0.00|
|State withholding taxes payable||£0.00|
|Unemployment taxes payable||£0.00|
|Accrued income taxes||£0.00|
|Credit card payable||£0.00|
|Bank loan payable||£0.00|
|Owner’s drawing account||£0.00|
|Additional paid-in capital||£0.00|
|Sales returns and allowances||£0.00|
|Gain (loss) on sale of assets||£0.00||£0.00|
|Purchase returns and allowances||£0.00|
|Cost of goods sold – materials||£0.00|
|Cost of goods sold – labor||£0.00|
|Cost of goods sold – direct expenses||£0.00|
|Cost of goods sold – indirect expenses||£0.00|
|Bad debt expense||£0.00|
|Credit card fees expense||£0.00|
|Dues and subscriptions||£0.00|
|Permits and licenses||£0.00|