Trial balance definition
/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 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.
The trial balance can also be used to manually compile financial statements, though with the predominant use of computerized accounting systems that create the statements automatically, the report is rarely used for this purpose.
The trial balance is strictly a report that is compiled from the accounting records. However, since adjusting entries may be made as a result of reviewing the report, it could be said that trial balance accounting encompasses the adjustment process that converts an unadjusted trial balance into an adjusted trial balance.
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Types of Trial Balances
When the trial balance is first printed, it is called the unadjusted trial balance. Then, when the accounting team corrects any errors found and makes adjustments to bring the financial statements into compliance with an accounting framework (such as GAAP or IFRS), the report is called the adjusted trial balance. The adjusted trial balance is typically printed and stored in the year-end book, which is then archived. Finally, after the period has been closed, the report is called the post-closing trial balance. This post-closing trial balance contains the beginning balances for the next year’s accounting activities.
How the Trial Balance is Used in a Consolidation
If there are subsidiaries in an organization that report their results to a parent company, the parent may request an ending trial balance from each subsidiary, which it uses to prepare consolidated results for the entire company. Alternatively, the parent company may require all of its subsidiaries to use the same accounting system, so that all subsidiary results can be automatically rolled up into consolidated financial statements.
Problems with the Trial Balance
Even when the debit and credit totals stated on the trial balance equal each other, it does not mean that there are no errors in the accounts listed in the trial balance. We note below several ways in which errors could occur and yet not be spotted by reviewing the trial balance:
Entry to wrong account. A debit could have been entered in the wrong account, which means that the debit total is correct, though one underlying account balance is too low and another balance is too high. For example, an accounts payable clerk records a $100 supplier invoice with a debit to supplies expense and a $100 credit to the accounts payable liability account. The debit should have been to the utilities expense account, but the trial balance will still show that the total amount of debits equals the total number of credits.
Entry in wrong amount. An entry could have been made in the wrong amount. For example, an entry in which the debit and credit should both have been $100 is instead entered as $1,000 to both the debit and credit accounts. This means that the entry is balanced, and so would not be spotted via a trial balance review - and yet is still incorrect.
Reversed entry. An entry could have been made in reverse, where the amount to be debited was actually credited, while the account to be credited was debited. This is an easy error to make. Again, the entry would still balance, and so would not be spotted by reviewing the trial balance.
No entry made. The report will not uncover situations in which an entry should have been made, but was not. This type of error can only be detected by comparing individual journal entries to a checklist of entries that should be made within each reporting period.
The Difference Between a Trial Balance and a General Ledger
A trial balance only shows the ending balance in each account, while a general ledger also shows the detailed transactions that comprise the ending balance, or at least points toward the relevant subledger that contains this information. This additional level of detail reveals the activity in an account during an accounting period, which makes it easier to conduct research and spot possible errors.
Who Uses the Trial Balance?
The main user of the trial balance is the general ledger accountant (or the bookkeeper in a smaller business). This person uses it as part of the month-end and year-end closing process, to ensure that the debit and credit totals match. If not, then further investigation is needed. In addition, the year-end trial balance is typically asked for by auditors when they begin an audit, so that they can transfer the account balances on the report into their auditing software; they may ask for an electronic version, which they can more easily copy into their software.
The trial balance is strictly for use within the accounting department. It is not distributed elsewhere within an organization, and it is not read by outside parties, other than the auditors.
Trial Balance Format
The initial trial balance report contains the following columns:
Account number
Account name
Ending debit balance (if any)
Ending credit balance (if any)
Each line item only contains the ending balance in an account. All accounts having an ending balance are listed in the trial balance; usually, the accounting software automatically blocks all accounts having a zero balance from appearing in the report.
The adjusted version of a trial balance may combine the debit and credit columns into a single combined column, and add columns to show adjusting entries and a revised ending balance (as is the case in the following example).
Example of a Trial Balance
The following trial balance example combines the debit and credit totals into the second column, so that the summary balance for the total is (and should be) zero. Adjusting entries are added in the next column, yielding an adjusted trial balance in the far right column.
ABC International
Trial Balance
August 31, 20XX
