How to prepare a trial balance
/What is a Trial Balance?
The trial balance is an accounting report that lists the ending balance in each general ledger account. This means that it states the total for each asset, liability, equity, revenue, expense, gain, and loss account. The report summarizes all journal entries made, aggregated by account. The result is a report that shows the total debit or credit balance for each account, where the grand total of the debits and credits stated in the report sum to zero.
The trial balance is run as part of the month-end closing process. The report is primarily used to ensure that the total of all debits equals the total of all credits; this means that there are no unbalanced journal entries in the accounting system that would make it impossible to generate accurate financial statements.
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How Do You Prepare a Trial Balance?
The first step in the process of creating financial statements is to prepare a trial balance. A trial balance is prepared at the end of each reporting period. This is done in order to aggregate accounting information for inclusion in the financial statements. To prepare a trial balance, follow these steps:
Create an eight-column worksheet, with column headers for the account number, account name, debit total, and credit total. These cover the initial entries into the spreadsheet. We will add the remaining column titles later.
For each general ledger account, summarize the account balance so that there is a single ending account balance that is either a debit or a credit.
Beginning with the first account in the general ledger, transfer to the trial balance worksheet the account number and account name. If the ending balance in the account is a debit, enter this amount in the debit column for that account. if the ending balance is a credit, enter this amount in the credit column for that account.
Add up the amounts in the debit column and add up the amounts in the credit column. The totals should match. If not, either an account balance was not transferred over to the trial balance, or it was carried forward incorrectly, or the general ledger is incorrect. Fix these issues before proceeding.
Add titles to the fifth and sixth columns of the worksheet, which are for adjusting debits and adjusting credits. Use these columns to enter any adjusting entries. These adjustments are usually for accrual entries to either defer or accelerate the recognition of expenses.
Add titles to the seventh and eighth columns of the worksheet, which are for the final debit totals and final credit totals. The entries in this column are the original debits and credits, plus or minus the adjusting entries.
Add up the amounts in the final debit column and add up the amounts in the final credit column. The totals should match. If not, an adjusted account balance was not carried forward correctly. Fix these issues before proceeding.
The trial balance is now ready for use in the preparation of financial statements. It is quite possible that the preliminary financial statements that are derived from this trial balance will require further adjustments, in which case the additional changes are made to the adjusting entry columns, and new financial statements are created.
A trial balance is not needed in a computerized accounting system, since the software automatically prepares the financial statements from the information in the general ledger; there is no intermediate step to also prepare a trial balance.