A trial balance is a financial statement that lists the accounts of a business and their respective balances at a specific point in time. It is a report that summarizes all the balances of various ledger accounts in a business’s accounting system.
A trial balance is used to ensure that the total debits equal the total credits in the accounting records, thereby providing a snapshot of the business’s financial position. The trial balance is typically prepared at the end of accounting period, such as a month, quarter, or year.
How Trial Balance Works
The trial balance works by comparing the sum of the debit balances with the sum of the credit balances in the general ledger. The balance of each account in the ledger is transferred to the trial balance sheet, and the totals of the debit and credit columns are calculated. If the debits and credits match, it is assumed that the accounting records are error-free, and the trial balance is said to balance. However, if the debits and credits do not match, it indicates that there are some errors in the accounting records that need to be rectified before preparing the final financial statements.
Types of Trial Balance
There are two types of trial balance:
- Unadjusted Trial Balance: an initial trial balance prepared before any adjustments are made to the accounts.
- Adjusted Trial Balance: a trial balance prepared after all adjusting entries have been made to the accounts at the end of the accounting period.
Trial Balance vs. Balance Sheet
While the trial balance aims to ensure the accuracy of accounting records, the balance sheet is a financial statement that reports the company’s financial position at any given point in time. The balance sheet shows the company’s assets, liabilities, and shareholders’ equity, while the trial balance merely summarizes the balances in the accounts.
Moreover, a trial balance can be prepared at any time, while the balance sheet is usually prepared at the end of each accounting period. The trial balance serves as the basis for preparing financial statements, including the balance sheet.
Trial balance is an important tool for businesses to maintain accurate accounting records and ensure the completeness and accuracy of their financial statements. By comparing the debit and credit balances in the accounts, businesses can detect any errors in their accounting records and rectify them before preparing the final financial statements.