In the accounting process, the trial balance is one of the last steps that will take place, occurring just before you prepare the balance sheet and the income statement. The trial balance is not meant for outside use, and is intended only to be seen and used internally, by the managers and owners of a business. It lists all of the accounts that were used during the accounting cycle, which is normally one month, as well as the balances of these accounts. The intention of the trial balance is to illustrate that the debit balances of these accounts equal out to the credit balances.
If you’re not quite a professional accountant or bookkeeper, and you do the accounting for your own business in order to save some money, you may need to brush up on this financial statement. If that’s the case, then you’ve come to the right spot. Today, we’ll explain how to put together this statement, as well as show you an example of it. If you’re new to bookkeeping, and would like to learn more about it, as well as to familiarize yourself with some helpful software, this course on the basics of bookkeeping may be useful, as will this article on the best money management software.
Explanation of the Trial Balance
Before showing you an example of the trial balance, we’ll begin by explaining what it looks like, as well as some of the accounts that may be found in this financial statement. The trial balance is prepared after all of the current period’s transactions have been journalized and posted to the general ledger, and, as we mentioned above, before the balance sheet and income statement.
The layout of the trial balance is quite simple, easy to read, and just makes a lot of sense. When preparing this, or any other financial statement, you may opt for the old-fashioned way, and enter it into a physical ledger, or, if you’re proficient in this kind of thing, use a handy accounting program. If the technological method is more your speed, this course on QuickBooks for small business may prove quite handy, as well as this course on preparing financial statements for entrepreneurs.
- In your program, or on the paper, which should have at least three columns, list all of the accounts still open on the general ledger.
- Next, list the balances of these accounts. Because you used the first of the three columns listing the accounts, you now have two left over for the balances of the accounts. The left column will list amounts that have debit balances (assets, expenses), and the right column is reserved for those amounts that are credit balances (liabilities, equity, revenue).
- Finally, add up the debit balances, then the credit balances. If everything is correct, the debits should equal the credits, hence the name, “trial balance“.
Make sure to be aware that there may potentially be negative amounts in your trial balance. If that’s the case, make sure you remember to list the negative amount in its appropriate column. If it is a debit account, and it’s negative, it still belongs in the debit column, not the credit, and should be posted with a negative sign in front of it (-), or in parentheses.
Trial Balance Example
So we’ve explained what the trial balance looks like, but that’s only effective to a certain point. Now, we will show you what a very simple version of one looks like in the flesh, so to speak. In this example, we are keeping it relatively simple for the sake of illustration, but in the real world, the trial balance would be a bit more complex, with more accounts involved.
|Trial Balance as of March 31, 2014|
Here we have the trial balance for Joe’s Garage. As you can see, the accounts are listed on the left, with their balances on the right. Fortunately for Joe, his bookkeeper kept good records, and has equal amounts in the debits and the credits, which is what he wants. Also lucky for Joe, he has no negative amounts, so business is good right now. Now that the trial balance is completed, the bookkeeper can go on to complete the balance sheet and income statement.
Also, don’t forget to properly label all financial statements. There should be no confusion as to what business this statement is for, what kind of a statement it is, or what dates the numbers refer to. All of this is basic accounting, which you would learn in this course, which teaches you the basics of financial accounting.
Potential Errors Whoops! If after you complete your trial balance, and some of the numbers don’t quite add up, there are a few things that might have gone wrong in the process:
- You forgot to include one of the ledger accounts in the balance.
- It’s possible you posted the incorrect amount.
- You may have posted the a transaction to the wrong account.
- You could have posted a journal entry twice, perhaps in the ledger, or the journal.
As you can see, it behooves you as a small business bookkeeper or accountant to be quite stringent when keeping track of your finances. If you aren’t, it can come back to bite you, not only in time and money, when you have to spend valuable hours amending your mistakes, but also there could be potential problems with the IRS or SEC. If you feel like you have a good grasp of the basics of accounting and would like to try your hand at more advanced concepts, this course (the second of two), on advanced financial accounting, will introduce you some of the more complex accounting ideas.