A trial balance is a list of every account in your general ledger with its balance at a given date, split into a debit column and a credit column. Because every transaction is recorded with equal debits and credits, the two columns should add up to the same total. It is the checkpoint between recording transactions and preparing financial statements.
How to prepare one
- Choose the date. Usually a month end, quarter end or year end.
- List every ledger account that has a balance, including bank, receivables, payables, equity, income and expenses.
- Place each balance in the correct column. Assets and expenses normally carry debit balances. Liabilities, equity and income normally carry credit balances.
- Add up each column and compare the totals.
A worked example
The figures are illustrative.
| Account | Debit | Credit |
|---|---|---|
| Cash at bank | 5,000 | |
| Receivables | 3,000 | |
| Inventory | 4,000 | |
| Equipment | 8,000 | |
| Payables | 2,500 | |
| Loan | 6,000 | |
| Owner's capital | 10,000 | |
| Sales | 12,500 | |
| Cost of sales | 7,000 | |
| Rent | 1,500 | |
| Wages | 2,500 | |
| Total | 31,000 | 31,000 |
Both columns come to 31,000, so the trial balance balances.
What a balanced trial balance does not prove
Equal totals show that the debits and credits recorded are equal. They do not show that the right accounts were used. The books can balance and still contain errors such as:
- Omission. A transaction was never recorded, on either side.
- Wrong account. An expense was posted to the wrong expense account, or a cost to an asset.
- Compensating errors. Two mistakes of the same size cancel each other out.
- Wrong amount on both sides. The same incorrect figure was recorded as the debit and the credit.
- Reversed entry. A debit and credit were swapped, which still balances.
This is why a trial balance is reviewed as well as totalled: look at each balance and ask whether it makes sense.
If it does not balance
- Find the difference and write it down.
- Check whether the difference is divisible by 9. A transposed number, such as 63 recorded as 36, creates a difference divisible by 9.
- Halve the difference. If half the difference matches an amount in the books, that amount may have been posted on the wrong side.
- Look for a one-sided entry, a debit or credit with no matching side.
- Recheck the additions and the balances carried forward.
- Look at suspense accounts. An unexplained balance there often points to the problem.
From trial balance to statements
The income and expense balances form the profit and loss statement. The asset, liability and equity balances form the balance sheet. When you have posted period-end adjustments such as accruals and depreciation, the resulting list is called an adjusted trial balance, and statements are normally prepared from that. Our month-end close checklist shows where the trial balance fits in.