Trial Balance: What is Purpose of it in the Accounting Cycle

chart of accounts

Duplication in the listing of one of the individual account balances. The purpose of the trial balance is to ensure that all entries made into an organization’s General Ledger are accurate and balanced. If this isn’t the case, try halving the difference and seeing if a balance of that amount has been included in the wrong side of the trial balance, where it would have a double impact on the discrepancy. If the trial balance totals do not agree, you should try to find the error. A trial balance allows a company to quickly gauge its books and to know whether or not it’s standing on solid ground.

For example, if you determine that the final debit balance is $24,000 then the final credit balance in the trial balance must also be $24,000. If the two balances are not equal, there is a mistake in at least one of the columns. The totals equal $8,500 on both sides for the accounting period in question, meaning the books are balanced.

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Once adjusting entries are made, you will need to run an adjusted trial balance, which will display the new ending balances of all of the general ledger accounts. One of many useful accounting tools, particularly for those new to accounting, a trial balance is used in preparation for creating both adjusting entries and closing entries, as well as other 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. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them.

trial balance example

So, now from the trial balance, it becomes easy to get concrete information of what is the actual status of the assets, liabilities, expenses or income rather than having abstract access to information. So, trial balance provides the summary for the ledger accounts. The report also totals the debit and credit columns at the bottom. As with all financial accounting, the debits must equal the credits. If it’s out of balance, something is wrong and the bookkeeper must go through each account to see what got posted or recorded incorrectly. A Trial Balance is a list of accounts’ Debit and Credit balances in a double-entry ledger at a given date prepared primarily to test their equality.

What Is a Trial Balance? Everything You Need to Know (

Now a new period begins, and the accounting department returns to the first step of collecting and analyzing transactions. The right-hand columns list the transaction amount for each sub-ledger account under either the debit or the credit column. Assets are listed first, then liabilities, then equities and finally expenses. This order corresponds with the arrangement of a balance sheet. Debits and credits are the two entries utilized in double-entry bookkeeping.

Is trial balance a journal?

A Trial Balance is a statement prepared at the end of a financial year to depict the debit or credit balances of all ledger accounts. The Ledger is also known as the principal book of accounts. It gets prepared after the financial transactions of a business are recorded in a journal.

We can say that a trial balance not only provides evidence of the arithmetical accuracy of the ledger but that it also serves as a summary of all transactions made since the end of the previous accounting period. Similarly, the balances of accounts relating to income or revenue show income earned from each source in the accounting period to which the trial balance relates. It is worth noting that the balances of the accounts are bought onto the trial balance.

Limits of a trial balance

After you finish entering all of the trial balance examples from your ledgers, you will need to add them up to ensure that both the debit and credit columns balance. The purpose of a trial balance is to ensure that all debit transactions entered into the general ledger equal all of the credit transactions that have been entered. When forming a trial balance, all accounts with a debit balance will be added together in the left column, and all accounts with a credit balance will be added together in the right column. By checking this, if an accountant finds that the trial balance does not agree, any differences can be investigated and straightened out prior to crafting the financial statements.

Accounts are listed in the accounting equation order with assets listed first followed by liabilities and finally equity. A trial balance is so called because it provides a test of a fundamental aspect of a set of books, but is not a full audit of them. In this example, the debits equal credits ($120,000 and $120,000), which suggests that the debit and credit entries are accurate. Asset accounts like cash, accounts receivable, inventory, furniture, etc., show the position of the assets at the end of the accounting period. Some of the errors are highlighted by trial balance and these can be rectified before the preparation of final accounts. Some companies need to create financial statements quarterly, while others only annually.

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