The trial balance is a list of debit and credit balances in the ledger accounts of a business at a given date. The debit and credit sides of trial balance must be equal to indicate that maintenance of the ledger accounts under the double entry system is accurate. Hence, it's a measure of the accuracy of an entity's accounts. However, the balancing of debit and credit balances doesn't necessarily mean that the financial statements have no material errors. This is because some financial statement items may not be included in the ledger accounts, a mistake known as the error of omission.
Balancing of Books
The ending balances of all accounts of an entity for a given financial period are summarized in the trial balance. To ensure that the balances of the various business accounts are correct, the debit and credit totals must be equal. If this is not the case, then some of the individual accounts are incorrect and hence you must carry out adjustments to address this anomaly.
Errors can be committed when preparing books of accounts. For example, employees who prepare the accounts may make mistakes in adding the entries. Various errors can be committed when preparing the books of accounts, such as errors of omission and commission. However, the trial balance mainly detects arithmetical errors. Failure of the debit and credit sides of the trial balance to agree indicates that errors exist in the books of account.
The main aim of preparing a trial balance is to ensure that the bookkeeping system is mathematically correct. Prior to preparing the final accounts at the end of an accounting period, a trial balance is prepared to detect arithmetical errors. The trial balance ensures that all the postings made to the ledger accounts do not contravene rules of double entry bookkeeping.
Preparing Final Accounts
Preparation of final accounts, income statements and balance sheets is the final stage of financial reporting. Transfer of balances from the ledger accounts to the trial balance occurs at the end of the accounting period. The income statement and balance sheet are then prepared using the account balances indicated in the trial balance.
Aids in Comparison
Because a trial balance is a summary of all the ledger accounts in an accounting period, it's an effective comparison tool. It's easy to compare balances of the current period with those of previous periods. Manually collecting data from the ledger account for purposes of comparison consumes more time compared to when a trial balance is used.
- Future accountant: Trial Balance Preparation and Purpose
- Quick MBA: Trial Balance
- "Principles of Accounting"; Leroy F. Imdieke, et al.; 1989
Diana Wicks is a Canadian residing in Vancouver. She began writing in 2004 while still a student at Lincoln School of Journalism, in the city of London. She has worked as Chief Editor of Business Chronicle, an online magazine based in London. Wicks holds a Bachelor of Arts (Honors) in journalism and a Master of Business Administration from the London School of Economics.