A trial balance is an internal report or worksheet that compiles balances of all ledger accounts into debits and credits. Businesses use a trial balance to ascertain that their bookkeeping system is arithmetically correct.
In a double-entry bookkeeping system, all the financial transactions of a business are recorded daily. A transaction recorded is known as a journal entry. These journal entries are summarized and categorized into various ledger accounts.
A ledger contains two columns that list debit and credit accounts of the business. The left-sided column is called the debit account, and the right-sided column is called the credit account.
In the trial balance, the debits and credits of the ledger accounts are compiled and balanced. When the sum of all debits equals the amount of all credits, then the accounts are in balance. If there is any mismatch, it means there is a mathematical error in bookkeeping.
Uses of Trial Balance
Trial balance is mainly used mainly in the manual accounting system. It has the following uses.
1. Trial Balance as a Summary Report
A trial balance is mandatory for preparing a financial statement. As such, a trial balance is a summary report for a particular period. In general, businesses make a trial balance at the end of a reporting period.
This summary report will provide the necessary information for the stakeholders of a business to know about the financial health of the company.
2. Trial Balance Eases Posting Adjustments
Auditors and accountants use trial balances to show the general ledger account balances before proposed adjustments, for making balance adjustments and displaying the account balances after the changes.
The adjusted amounts of money become adjusted trial balance and are thus appear in financial statements of the business.
3. Trial Balance To Track Financial Transactions
The trial balance, being a summary report, gives a bird’s eye view of all the financial transactions of a business.
4. Trial Balance Determines Credibility
Banks and lending agencies use the trial balance to assess how much they can lend to the business, the repaying capacity of the company, and other such details. The trial balance thus determines the financial credibility of the business.
Can Trial Balance Identify All Accounting Errors?
A tallied trial balance does not mean that there are no errors in accounting. The trial balance only determines mathematical accuracy. It cannot detect errors such as wrongly classified transactions, missing accounting entries, etc., that occurred during bookkeeping.
Trial Balance Preparation Methods
There are three types of trial balance preparation methods.
- Total Method: In this method, the debits and credits of all the ledger accounts are totaled and carried forward for the trial balance. Though this method saves time by avoiding balancing each ledger account and then doing a trial balance, it is not generally used as final accounts cannot be prepared using the method.
- Balance Method: Businesses prefer this method the most. In this method, first, all the ledger accounts are totaled and balanced. Then, the balances are transferred to the trial balance.
- Total and Balance Method: It is a combination of both the methods mentioned above. In the trial balance sheet, there will be two columns of totals and balances.
From the above, it is clear that the trial balance has many benefits. It is mandatory for the closure of books of accounts and for preparing financial statements. Businesses are thus using the trial balance to analyze their business.