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If you’re in charge of your business’s finances, you’ll want to have a handle on all the reports your business needs to ensure its finances are running smoothly.One report you may find helpful is a trial balance. Prepared at the end of every reporting period, a trial balance is a worksheet that provides a quick accuracy check of your books. If the trial balance shows equal credits and debits, you can use it to prepare your balance sheet. If it reveals an error, you can fix it before you prepare any official financial statements.Here’s a closer look at what a trial balance sheet is, why you’d use one, and the difference between trial balance and balance sheets.
What Is a Trial Balance Sheet?
A trial balance sheet lists the balances of all general ledger accounts of a company at a certain point in time. The debit balance amounts are entered in one column (called “debits”) and the credit balance amounts are entered in another column (called “credits”). Each column is then tallied at the bottom to prove that the total of the debit balances is equal to the total of the credit balances. The goal of preparing a trial balance is to make sure the entries in a company's bookkeeping system are mathematically correct.Generally, a trial balance is generated for internal use in a company and isn’t distributed publicly.
How Trial Balance Sheets Work
The double-entry principle in small business accounting means that for every debit, there is an equal credit. As a result, every credit entered into a company’s account must have an offsetting debit somewhere else. In addition, the total credits from all ledger accounts must equal the total debits from all accounts. A trial balance moves all credits and debits into one spreadsheet so that someone can make sure that everything lines up. If it does, the transactions posted in ledger accounts in terms of debit and credit amounts are correct. If it doesn’t, some work may be required to get them aligned. The key difference between a trial balance and a general ledger is that the ledger shows all of the transactions by account, while the trial balance only shows the account totals, rather than each individual transaction.
What Trial Balances Include
Typically, a business initially records its financial transactions in bookkeeping accounts within the general ledger. Because of double-entry accounting, these transactions are recorded as both a credit and a debit to corresponding accounts. For example, if you have any type of small business loan, you credit accounts payable (liability account) and, though it may seem illogical, you also need to debit the cash account (an asset).General ledger accounts typically include:
Assets
Equity
Income
Gains
Liabilities
Expenses
Losses
The trial balance is created by tallying all of the debits and credits from each account, then placing these sums in the debit or credit column for each account. Something to note: If any adjusting entries were entered in the general ledger, such as a doubtful account allowance, you would also include that in the trial balance. The worksheet should show the figures before the adjustment, the adjusting entry, and the balances after making the adjustment.
Undetectable Errors in a Trial Balance
A trial balance is designed to provide a quick way to ensure that debits and credits match up. If they don’t, there’s an error somewhere. However, a trial balance may not show the following types of errors:
Reversal
Omission
Original entry
Commission
Principle
Errors of Reversal
When using double-entry accounting, there is a credit and a debit of the same amounts. Sometimes, however, a credit is entered incorrectly as a debit or vice versa. A trial balance won’t reveal this type of mistake.
Errors of Omission
If a transaction wasn’t entered into the accounting software, it won’t appear in the trial balance.
Errors of Original Entry
A trial balance won’t tell you if an incorrect amount was entered as a credit and a debit.
Commission Errors
This happens if the wrong account is debited or credited, and is often a mistake caused by oversight.
Principle Errors
This is another mistake that occurs when the wrong account is debited or credited. Rather than being an oversight, however, it may be a mistake in understanding accounting principles, and which types of expenses or revenues should be categorized under which types of accounts .
Trial Balance Sheets vs Balance Sheets
While both a trial balance and a balance sheet look at debits and credits and must find equilibrium between the two, there are some differences between these two financial reports.
Trial Balance Sheets
Balance Sheets
Used internally
Used for external purposes
Used to see whether the total of debit balances equal credit balances
Used to demonstrate the accuracy of a company’s financial affairs
Every account is divided between credit and debit balances
Every account is divided among liabilities, assets, and equity
A trial balance lists all of the company accounts, along with the balance of credits and debits for each. Once all of the accounts and values are complete, you add up the total in each column. Here is an example:
Account Name
Debits
Credits
Cash
$60,000
Bills Receivable
$11,000
Bills Payable
$9,000
Bank loan
$13,200
Sales
$50,000
Rent
$1,000
Utilities
$200
Salaries
$2,000
Total
$73,200
$73,200
If the totals match, as they do in the above example, there are no obvious errors in the ledger. If the totals are different, however, it tells you that something is wrong. The next step is to locate the problem in the ledger and correct it before you prepare any other financial statements.
Preparing a Trial Balance
Most accounting software systems can generate a trial balance with the click of a mouse. The system will also update your trial balance with each entry you make. However, it’s not hard to create a trial balance yourself. Simply follow these steps.
Create a table with three columns entitled (from left to right): Account Name, Debits, and Credits. An optional fourth column (placed to the left of Account Name), would be Account Number.
Use the company’s chart of accounts to locate all of the account names and list them in the Account Name column (if desired, include account numbers in the appropriate column).
Go to each account and add up all of the debits and credits during the accounting period. Subtract the smaller number from the larger number and place the remainder in the appropriate column. For example, if the cash account had a total of $6,000 in debits and $5,000 in credits, you would place $1,000 in the debits column.
Total each column and put the numbers at the bottom. If the totals are the same, your trial balance is balanced.
The Takeaway
A trial balance is a worksheet that helps ensure your company’s bookkeeping is accurate, up to date, and balanced. It’s a great report to use internally before creating your balance sheet. Unlike a trial balance, a balance sheet is an official financial statement that will be shared with external parties.If you apply for a small business loan, for example, the lender will likely examine your balance sheet to see how much cash you have on hand, how much money is tied up in assets, and how much debt you currently have. They want to make sure that your business has enough available cash to manage your loan repayments.
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Frequently Asked Questions
What goes on to a trial balance sheet?
How are trial balance sheets and balance sheets different?
What is the point of a trial balance?
Photo credit: iStock/BongkarnThanyakij
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
