Trial balance explained

When transactions are posted to the ledger, there is the need to test if the postings are accurate. The trial balance helps acheive these. It tests the accuracy of ledger entries. But, that's not all. In this article, we define and explain the importance of this accounting tool.

1. What's trial balance

The trial balance is a list that shows the balances of the ledger at the end of the period. Also, it is defined as the tool used in accounting to test the accuracy of ledger entries. This list also helps in the preparation of the income statement and the balance sheet. In a manual bookkeeping system such as the use of a ledger book or leaflet, the accountant must prepare the trial balance to check if the items posted to the ledger complies with the double entry principle.

However, with electronic accounting systems such as the use of spreadsheets and accounting software, trial balances are automated. In a spreadsheet, formulas can be created in the sheet to help identify accounts in the ledger or journals to the trial balance. In software, the programmer has set it up in a way that items posted to the electronic ledgers accounts are automated and update the trial balance as they are posted. Therefore, on a daily basis, the correctness of those accounts can be known.

2. Rules guiding trial balance

A sample trial balance is shown below. In the format you will notice that items of assets, expenses, and losses are on the debit side. While items of liabilities, equity, income, and gains are posted to the credit side. Simply put, the rule is to debit all assets, expenses, and losses. Credit liabilities, equity, income, and gains.

3. Importance of trial balance in a business

3.1 Check accuracy

A trial balance helps to check the accuracy of ledger accounts. Therefore, if there are errors it can be detected. When the debit and credit side have differences, in the summed total, it means errors in ledger postings. And this can be corrected by tracing the transactions in the accounts.

3.2 Prepare financial statements

It aids the preparation of the financial statements of an entity. With it, the profit or loss statement and the statement of financial position can be prepared and presented to users seamlessly.

3.3 Show balances of ledger

The figures in the lists represent the balances in each ledger account. At a glance the accountant knows the balances on the accounts.

3.4 Useful to auditors

Auditors usually carry out trials to test figures for accuracy. Transactions can be traced from financial statements to source documents and vice versa. Also, one of the first things auditors ask before carrying out an audit is these list.

4. Conclusion 

To conclude, a trial balance is a list that proves the accuracy of ledger accounts. Accountants and auditors need it to carry out their job effectively. More so, with the use of computers the list is usually automated thereby helping the accountant to focus on other important aspects of his job.