Trial Balance: 6 important things to know

A trial balance is a critical internal accounting report that lists the closing balances of all general ledger accounts to verify that total debits equal total credits. This document serves as the primary diagnostic tool in the accounting cycle, ensuring the mathematical accuracy of the double-entry bookkeeping system before the preparation of final financial statements.

While it confirms that the ledger is in balance, it is important to recognise that a matching trial balance does not guarantee the absence of all errors, such as transactions that were omitted entirely or posted to the wrong accounts. The article provides a comprehensive breakdown of the six fundamental aspects of a trial balance, including its purpose, the rules of double-entry, and its limitations in error detection.

This guide is distinct because it focuses on the practical application and common pitfalls encountered by bookkeepers and accounting students during the reconciliation process.

Key Takeaways

• A trial balance serves as an internal check to ensure total debits and total credits match perfectly.
• It acts as a foundational summary for preparing the income statement and the statement of financial position.
• Matching totals do not detect errors of omission, commission, or original entry within the general ledger.
• The report includes assets, liabilities, equity, revenue, and expense account balances at a specific point in time.

The Trial Balance is the 4^th step in the Accounting Cycle. It is the nail-biting moment for students of accounting. It tells you a lot about your performance thus far, and can leave you feeling frustrated or relieved when you’re done.

Writing up a Trial Balance is very simple. It is the borderline between the bookkeeper’s job and the accountant’s job. Here are 6 important things to know about the Trial Balance.

6 important things to know about the Trial Balance

Balances come from the Ledgers and Cash Book

So, we are aware that there are only 3 types of Ledgers, but guess what? The Cash Book is also a subsidiary ledger when no Cash and Bank accounts are present in the General Ledger.

In other words, if there is a Cash Book, it serves as a book of original entry and the balances of the Cash and Bank columns go to the Trial Balance. If, however, there is no Cash Book, then all balances come from the General Ledger, Sales Ledger and Purchases Ledger.

A balanced Trial Balance means correct mathematics

Seeing a balanced Trial Balance feels like the moment you have been waiting for. It means that your calculations are accurate.

Accounting students like to take a break when this happens because it feels like something great have been accomplished. This could mean that you are ready to move on to the 5^th step of the Accounting Cycle or it could mean other things.

A balanced Trial Balance does not mean no errors

Here comes the rain to fall on your parade! A balanced Trial Balance does not mean that there are no errors in your Ledgers. It simply means that your debits and credits match, not that they are correct.

When you check your work for accuracy, you would be surprised to find out that there are 6 different types of errors that are not revealed by the Trial Balance.

Errors that do not affect the Trial Balance

Error of Commission – correct amount, wrong account

Error of Omission – both entries are not recorded

Error of Principle – correct amount, wrong type of account

Error of Original Entry – correct account, wrong amount

Complete Reversal of Entries – correct account and amount, wrong sides of the account

Compensating Errors – two or more error that are not related cancel out each other

Folio column keeps all accounts in check

Even though you’ve learned to ignore the Folio column when doing basic accounting, it’s actually a very important part of keeping track of your books. Every account has a tag that connects it to the first or second book of entry.

After posting the accounts to the Journals and leaving the Folio column empty, there are 3 steps to posting to the Folio column that you should know. For simplicity, the number 1 is used for page numbers and account numbers, but know that these can be any number.

You must label the Folio column in the Ledger accounts

Start labelling the Folio column in each Ledger account with the Journal’s name and page number from which it came.

Book and page number – Folio name

General Journal Page 1 – GJ 1

Cash Book Page 1 – CB 1

Sales Journal Page 1 – SJ 1

Purchases Journal Page 1 – PJ 1

Returns Inwards Journal Page 1 – RIJ 1

Returns Outwards Journal Page 1 – ROJ 1

You must label the Folio column in the Journals

Go back to the Journal and label each account with the Ledger’s name and account number in which it was recorded.

Ledger and account number – Folio name

General Ledger Account 1 – GL 1

Sales Ledger Account 1 – SL 1

Purchases Ledger Account 1 – PL 1

You must label the Folio column in the Trial Balance

Use the Folio numbers in the Ledgers and Cash Book to fill the column in the Trial Balance. The Cash Book only has 2 accounts which are Cash and Bank totals. They are either listed separately or totalled on the Trial Balance.

Ledger/Cash Book and account number – Folio name

General Ledger Account 1 – GL 1

Sales Ledger Account 1 – SL 1

Purchases Ledger Account 1 – PL 1

Cash Book Page 1 – CB 1

Know which accounts are debited and credited

Before you even start to do Journals, you should already know which accounts have debit and credit balances. However, there are many students who are still confused about this right down to doing a Trial Balance.

When you post accounts to the wrong side of the Ledger account, the Trial Balance will be off on one side. Here is an easy way to remember which accounts are debited and credited.

Debit Assets and Expenses

Credit Liabilities, Income and Capital

Know which accounts go the Income Statement and Balance Sheet

The final thing you should know about a Trial Balance is which accounts go to the Income Statement and Balance Sheet.

As you’ve completed the list of all the balances of assets, liabilities, income, capital and expenses, it is time to split them up into the correct Financial Statements.

Here is an easy way to remember which accounts go to the Income Statement and Balance Sheet.

Income Statement carries Income and Expenses

Balance Sheet carries Liabilities, Income and Capital

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Six critical aspects of a Trial Balance

Understanding the trial balance is essential for maintaining accurate financial records. Here are the six most important things to know about this accounting report.

The principle of double-entry bookkeeping

The trial balance is the direct manifestation of the double-entry system. Every business transaction affects at least two accounts; for every debit entry, there must be a corresponding credit entry of equal value. The trial balance aggregates these balances to prove that the fundamental accounting equation remains in equilibrium.

Purpose and internal utility

Unlike the balance sheet or income statement, a trial balance is typically an internal document. It is not intended for external stakeholders such as investors or tax authorities. Its primary utility lies in providing a “bird’s eye view” of the ledger, allowing accountants to identify discrepancies early in the reporting period.

Error detection capabilities

The most immediate benefit of a trial balance is spotting transposition errors or slide errors where digits are misplaced. If the two columns do not tally, it is a definitive sign of a mathematical or posting error. This stage allows for the creation of an adjusted trial balance after necessary corrections are made.

Limitations of the report

It is a common misconception that a balanced trial balance means the books are error-free. Several types of errors remain “invisible” to this report:

• Errors of Omission: A transaction was never recorded in the ledger.
• Errors of Commission: An entry was made in the wrong account but on the correct side (e.g., recording a payment to the wrong supplier).
• Compensating Errors: Two or more errors that cancel each other out mathematically.

Timing within the accounting cycle

Preparation of the trial balance usually occurs at the end of a reporting period (monthly, quarterly, or annually). It sits between the posting of journal entries to the ledger and the generation of final reports. In modern accounting, three versions often exist: the unadjusted, the adjusted, and the post-closing trial balance.

Distinction from the balance sheet

While they share similar data, a trial balance is a worksheet used for preparation, whereas the balance sheet is a formal financial statement. The trial balance includes temporary accounts like revenue and expenses, which are eventually closed out and do not appear on a post-closing balance sheet.

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See also:

ALICE: Assets, Liabilities, Income, Capital, Expenses

Accounting Cycle: Complete basic accounting in 8 steps

Goods for resale: Stock, Purchases, Sales, Carriages and Returns

Debit and Credit: Simple view of in and out

Increase and decrease of ALICE accounts

Expenses: Spending that’s direct, indirect, operating and non-operating

Income: Earned, unearned and contributed money

Cash Book: How to record cash, bank and discounts

Journals: Complete 7 Day Books with 4 types of transactions

Ledger accounts: Simple breakdown of Types, Format, Double Entry, Balance

Liabilities: Owed long and short-term items with a credit balance

Capital: Invested assets and the liquidity of a business