What is a Trial Balance in Accounting?

In our world of automation things tend to change such as reports becoming less important or processes becoming obsolete.  Such is the case with a trial balance in accounting.

A trial balance is a worksheet that lists all general ledger ending account balances into two columns either a debit or a credit.  The debits and the credits are then totaled to verify their balance.  This balancing step in the accounting process helps ensure the accuracy of the financial statements.

Automation has essentially eliminated the need for a trial balance by eliminating the possibility of an out of balance entry.  Accounting software checks the debits and credits and prevents the entry from being saved unless it is in balance.

However, understanding the principle of a trial balance is still important.

What does a trial balance in accounting look like?

Below is a sample trial balance sheet with a simple explanation.

The header

• Includes the title of the report “Trial Balance”, the name of the company, and the date which indicates a point in time.

Column 1

• Includes the account number.  Accounts are arranged in sequential order.  Only accounts that have a balance are typically included on the trial balance sheet.

Column 2

• Includes the account description and needs no further explanation.

Column 3

• Includes the account type.  This is an option column.  It indicates the type of account.  Notice balance sheet accounts are listed first followed by income statement accounts.

Column 4

• Is the ending debit balance for each specific account with a debit balance.  Typically, you will see asset and expense accounts with a debit balance.  In this example one equity account “retained earnings” has a debit balance which would indicate the company is operating at a loss.

Column 5

• Is the ending credit balance for each specific account with a credit balance.  Typically, you will see liabilities, equity and revenue accounts with a credit balance.

Total Row

• Indicates the debits and the credits both total $42,568.  If the balances do not match you will need to find the entry that is out of balance.

How do you prepare a trial balance sheet?

A trial balance sheet in accounting is prepared by pulling each account ending balance from the general ledger.  The general ledger includes a beginning balance, detailed transactions affecting the specific account and an ending balance.  You only need the ending balance for each account to include on a trial balance sheet.

A trial balance sheet can be easily created in an excel spreadsheet similar to the example shown above.

How do you read a trial balance sheet?

A trial balance in accounting is one of the easiest reports to read because the main purpose is to ensure the debits equal the credits.  By quickly scanning the report and focusing on the total line you can determine in a matter of seconds if the debits equal the credits.

Why is a trial balance important?

A trial balance in accounting is important for the following 3 reasons.

1. Avoids balance errors on the financial statements.  As an example, assume you operate in a manual environment and are required to prepare financial statements.  Next assume the debits do not equal the credits unbeknownst to you.

Based on these assumptions you invest the time preparing the balance sheet and income statement only to discover assets do not equal liabilities plus equity.  The trial balance helps you avoid this sort of error by confirming debits equal credits.

2. A trial balance benefits external auditors by providing them a summary of all ending balances for each general ledger account.  This helps them streamline the entry of balances into their audit software.
3. A trial balance may also serve as a guide to making adjustments.  See below for more explanation of this point.

A trial balance in accounting is less and less important in our automated world.  Accounting software has essentially eliminated the need for a trial balance as it does not allow unbalanced entries of debits and credits.  The double entry system of accounting means there is always a debit and a credit to every entry and software ensures this double entry happens.

While a trial balance may not be as important in our automated world, it is important to note that most software still has a trial balance report available.  You can find a trial balance report both in QuickBooks Online and Xero two of the more popular small business accounting software.

When is a trial balance prepared?

A trial balance is typically prepared at the end of each period that financial statements are prepared.  This might be monthly, quarterly or yearly.  In our automated world it could literally be printed at any moment so preparation is not much of an issue anymore.

What is the difference between a trial balance and a balance sheet?

Trial balance

is a summary of all ending balances in sequential order, it includes everything in a single account regardless if it is on the balance sheet or income statement.

Balance sheet

Also includes ending balance, but only assets, liabilities and equity account balances.  Unlike the trial balance, income accounts are included on the income statement.  

A balance sheet is also broken down into classifications of assets, liabilities and equity and subclassifications of current and long term, unlike the generic presentation of a trial balance.

What are the three types of trial balances?

With the simplicity of a trial balance one might wonder why there are 3 types of trial balances.  The difference really relates to balances.

1. Pre-Adjusted Trial Balance

The pre adjusted trial balance is all ending general ledger account balances prior to any adjustments.

2. Adjusted Trial Balance

The adjusted trial balance would show pre adjusted balances in the first column, any adjustments made in the center columns, with ending balances in the last column.  This is a good visual for some to quickly review any adjustments that are made and the accounts the adjustment effects.

3.  Ending Trial Balance

The ending trial balance will show only the ending adjusted general ledger account balances.

If the trial balance debit and credits balance, does that mean everything is good?

No.  The only thing a trial balance confirms is that debits equal credits.

There may be other errors not revealed by a trial balance such as:

• an entry posted to the incorrect account,
• a missing entry, or
• even incorrect amount entry.

Internal, external audits or financial statement analysis and review would be required to identify the above noted errors.

What is the difference between a general ledger and a trial balance?

A general ledger and a trial balance have one thing in common – they both include every account.

But the similarity stops there.  

A general ledger report details every account and all the detailed transactions that affected the account.  It is a detailed report, and typically will be many many pages long.

A trial balance report is a summary report showing only the ending account balances.