What is the Trial Balance?
A trial balance is an internal report a company runs at the end of an accounting period that shows the balances of all the accounts in the company’s accounting system. It is one of the key steps in a company’s accounting cycle.
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Accounts in the Accounting System
In financial accounting, companies record all transactions into individual accounts. There are five account types: asset, liability, equity, income (revenue), and expense. Each one of these account types contains numerous individual accounts.
Normal Account Balances
Each account has a “normal” (positive) balance. The normal balance for each account is either a debit balance or a credit balance, depending on the type of account. Asset and equity accounts have normal debit balances, while liability, equity, and income accounts have normal credit balances. The terms debit and credit simply mean left and right, respectively, and refer to the entry columns in an accounting journal.
Creating the Trial Balance
The balances for each account are contained in account ledgers. The account balances from these ledgers are used to create the trial balance.
Purpose of the Trial Balance
The main purpose of the trial balance is to verify the equality of debits and credits. In a double-entry bookkeeping system, total debit balances must equal total credit balances.
However, the trial balance can only detect numerical errors that violate debit and credit equality – for example, if a company makes a $200 sale and the transaction is entered into the sales account for $200 and the cash account for $20.
The trial balance cannot detect other types of errors, such as omitted entries, or entries in which the debt and credit entries are reversed.
A trial balance is run on an unadjusted and adjusted basis. The adjusted trial balance is run after adjusting entries have been made.
Example of a Trial Balance
Consider a company that records several transactions during an accounting period. The transactions are first recorded in the accounting journal and then posted to the individual account ledgers.
At the end of the accounting period, the company collects the balances from each ledger account and prepares the trial balance.
Suppose the company has the following balances:
Cash: $5,000 (debit) Equipment: $10,000 (debit)
Expenses: $2,000 (debit) Accounts Payable: $3,000 (credit)
Owner’s Equity: $10,000 (credit) Revenue: $4,000 (credit)
Total Debits = $17,000 Total Credits = $17,000
Because the totals are equal, the trial balance confirms that the accounting entries follow the rules of double-entry bookkeeping.
Key Takeaways
- A trial balance is an internal report that lists the balances of all accounts in a company’s accounting system.
- It is used to verify that total debit balances equal total credit balances.
- The trial balance is created using balances from the company’s account ledgers.
- A trial balance can detect numerical errors that cause debit and credit totals to be unequal.
- Companies prepare both an unadjusted trial balance and an adjusted trial balance during the accounting cycle.