Preparation of Trial Balance: Steps in the Preparation of Trial Balance

The accounts reflected on a trial balance are related to all major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to identify the balance of debits and credits entries from the transactions recorded in the general ledger at a certain point in time. 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.

They will work in a variety of jobs in the business field, including managers, sales, and finance. In a real company, most of the mundane work is done by computers. Accounting software can perform such tasks as posting the journal entries recorded, preparing trial balances, and preparing financial statements.

Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock
($20,000) and Service Revenue ($9,500) all have credit final
balances in their T-accounts. These credit balances would transfer
to the credit column on the unadjusted trial balance. For example, Cash has a final balance of $24,800 on the debit side. This balance is transferred to the Cash account in the debit column on the unadjusted trial balance.

Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock ($20,000) and Service Revenue ($9,500) all have credit final balances in their T-accounts. These credit balances would transfer to the credit column on the unadjusted trial balance. If the difference is divisible by 9, you may have made a transposition error in transferring a balance to the trial balance or a slide error. A transposition error occurs when two digits are reversed in an amount (e.g. writing 753 as 573 or 110 as 101).

How to prepare a trial balance

One other important use of the trial balance is that it can determine the arithmetic accuracy of the accounts. So if both columns of the trial balance tally, we can be reasonably assured of the accuracy of the accounts. It does not ensure that the accounts are free of all errors but it can at least establish mathematical accuracy.

A trial balance includes all your business accounts that have credits or debits during a given reporting period. It includes the amounts credited or debited to each account, the dates of the reporting period, the account numbers, and the totals for all credits and debits entered during understanding progressive tax that time. If you fail to make a journal entry or record a financial transaction in an incorrect account, it will not show up as an error in the trial balance. Numbers transposed in the debit column instead of in the credit column, also will not show up in the trial balance.

  • Transferring information from T-accounts to the trial balance requires consideration of the final balance in each account.
  • If you look at the worksheet for Printing Plus, you will notice there is no retained earnings account.
  • A company prepares a trial balance periodically, usually at the end of every reporting period.
  • If you’re preparing your trial balance with a spreadsheet software program like Microsoft Excel, you can insert a formula that will perform the calculation for you.
  • You’ll record the total credit amounts in the left column (i.e., the column immediately to the right of your account names) and your total debit balance in the column on the far right.
  • To get the $10,100 credit balance in the adjusted trial balance column requires adding together both credits in the trial balance and adjustment columns (9,500 + 600).

As you can see, the report has a heading that identifies the company, report name, and date that it was created. The accounts are listed on the left with the balances under the debit and credit columns. When the trial balance does not balance, try re-totaling the two columns. If this step does not locate the error, divide the difference in the totals by 2 and then by 9.

What Is a Trial Balance?

If the final balance in the ledger account (T-account) is a credit
balance, you will record the total in the right column. You can perform an adjusted trial balance once your book is balanced. This type of trial balance contains the final balances in all company accounts, and you can use it to prepare your official financial statements.

Unit 3: The Accounting Cycle

If the two balances are not equal, there is a mistake in at least one of the columns. Companies initially record their business transactions in bookkeeping accounts within the general ledger. Furthermore, some accounts may have been used to record multiple business transactions. A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.

How Are Accounts Listed in Trial Balance?

Enrol and complete the course for a free statement of participation or digital badge if available. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Review the annual report of Stora Enso which is an international company that utilizes the illustrated format in presenting its Balance Sheet, also called the Statement of Financial Position. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .

Looking at the asset section of the balance sheet, Accumulated Depreciation–Equipment is included as a contra asset account to equipment. The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425). The accounting equation is balanced, as shown on the balance sheet, because total assets equal $29,965 as do the total liabilities and stockholders’ equity. The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time.

If you review the income statement, you see that net income is in fact $4,665. The statement of retained earnings always leads with beginning retained earnings. Beginning retained earnings carry over from the previous period’s ending retained earnings balance. Since this is the first month of business for Printing Plus, there is no beginning retained earnings balance. Notice the net income of $4,665 from the income statement is carried over to the statement of retained earnings.

However, there still could be mistakes or errors in the accounting systems. A trial balance can be used to assess the financial position of a company between full annual audits. The key difference between a trial balance and a balance sheet is one of scope. 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, rather than just being used internally, and requires the signature of an auditor to be regarded as trustworthy.

Completing a Trial Balance

For instance, you register a transaction when it occurs, then record the same transaction once you receive payment. The trial balance simply records all of the transactions listed in your general ledger accounts on a separate spreadsheet so you can ensure that your journal entries are balanced and accurate. Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double entry accounting system. If the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean that there are no errors in a company’s accounting system. For example, transactions classified improperly or those simply missing from the system still could be material accounting errors that would not be detected by the trial balance procedure.

Rules for Preparation of Trial Balance

All three of these types have exactly the same format but slightly different uses. The unadjusted trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record of day-to-day transactions and can be used to balance a ledger by adjusting entries. From the trial balance we can see that the total of debit balances equals the total of credit balances. This demonstrates for every transaction we have followed the basic principle of double-entry bookkeeping – ‘ for every debit there is a credit ’.

Dana DiRenzo, MD