A trial balance is an important financial statement that reflects a company’s financial position at a specific time. The trial balance shows the cash, accounts receivable, and inventories on hand at the end of a particular period.
What Is A Trial Balance In Accounting?
A trial balance is a financial statement that lists all the accounts in a company’s general ledger and their balances at a specific point in time. The purpose of a trial balance is to ensure that the total amount of debit balances in the accounts equals the total amount of credit balances.
The trial balance is prepared by the bookkeeper or accountant at the end of an accounting period, such as a month or a year. It is used as a preliminary step in the accounting process to check for errors and to ensure that the accounts are in balance before preparing financial statements.
To prepare a trial balance, the bookkeeper or accountant will first list all of the accounts in the company’s general ledger. They will then calculate the balance of each account by adding up all of the debits and credits recorded in that account during the accounting period. The balance is calculated by subtracting the total credits from the total debits or vice versa, depending on the account type.
Once the balances have been calculated, the bookkeeper or accountant will list them in a trial balance report. The report will have two columns, one for the debit balances and one for the credit balances. The total of the debit column should equal the total of the credit column. If they do not match, it indicates an error in the accounting records that need to be corrected.
What Are Adjusted Trial Balances?
An adjusted trial balance is a financial statement prepared after adjusting entries have been made to a company’s general ledger accounts at the end of an accounting period. The purpose of an adjusted trial balance is to ensure that the total amount of debit balances in the accounts still equals the total amount of credit balances after the adjusting entries have been made.
Adjusting entries are made to the accounts at the end of an accounting period to ensure that the accounts reflect the company’s financial position accurately. These adjustments are necessary to record transactions that have occurred but have not yet been recorded or to correct account errors.
For example, if a company has received revenue in advance from a customer, the company would need to record that revenue as a liability until the product or service is provided to the customer. This adjusting entry would increase the liability account and the revenue account to reflect the amount of revenue received in advance.
To prepare an adjusted trial balance, the bookkeeper or accountant will first list all of the accounts in the company’s general ledger, including any adjusting entries that have been made. They will then calculate the balance of each account by adding up all of the debits and credits recorded in that account during the accounting period, including any adjusting entries.
Once the balances have been calculated, the bookkeeper or accountant will list them in an adjusted trial balance report. The report will have two columns, one for the debit balances and one for the credit balances. The total of the debit column should still equal the total of the credit column, even after the adjusting entries have been made.
The adjusted trial balance is used to prepare the company’s financial statements, including the income statement, balance sheet, and statement of cash flows. It provides a more accurate representation of the company’s financial position than the unadjusted trial balance, which only includes transactions recorded at the time of preparation.
When Should A Business Use A Trial Balance?
A business should use a trial balance at the end of an accounting period to ensure that the total amount of debit balances in the accounts equals the total amount of credit balances. This process helps to detect any errors or omissions in the accounting records before the financial statements are prepared.
A trial balance can be used in any business that maintains accounting records using the double-entry accounting system. This system requires that every transaction be recorded in at least two accounts, with one account debited and the other credited. The total amount of debits must always equal the total amount of credits in the accounts.
The trial balance is typically prepared after all of the transactions for the period have been recorded and before any adjusting entries are made. This allows the bookkeeper or accountant to check that the entries have been recorded correctly and to identify any errors or omissions.
The trial balance is also a starting point for preparing the company’s financial statements. The balances in the trial balance are transferred to the appropriate financial statements accounts, such as revenue and expense accounts, to prepare the income statement. The balances are also used to prepare the balance sheet, which lists the company’s assets, liabilities, and equity.
Types of Trial Balance
There are three trial balances: unadjusted trial balance, adjusted trial balance, and post-closing trial balance.
- Unadjusted Trial Balance: An unadjusted trial balance is a financial statement that lists all of the accounts in a company’s general ledger and their balances at the end of an accounting period without any adjustments. It is the first step in the accounting process and is used to check the accuracy of the initial recording of transactions in the accounting system. The unadjusted trial balance is prepared before any adjusting entries are made.
- Adjusted Trial Balance: An adjusted trial balance is a financial statement that lists all of the accounts in a company’s general ledger and their balances after adjusting entries have been made at the end of an accounting period. Adjusting entries ensure that the accounts accurately reflect the company’s financial position. The adjusted trial balance is used to prepare the company’s financial statements.
- Post-closing Trial Balance: A post-closing trial balance is a financial statement that lists all of the accounts in a company’s general ledger and their balances after the closing entries have been made at the end of an accounting period. Closing entries are made to transfer the balances of revenue, expense, and dividend accounts to the retained earnings account. The post-closing trial balance checks that the closing entries were made correctly and that the retained earnings balance is correct.
Conclusion
In conclusion, a trial balance is a critical financial statement tool that helps identify any discrepancies between actual and budgeted financial statements. Remember that it is important always to follow Generally Accepted Accounting Principles (GAAP) when preparing your trial balance. This will help ensure accurate and reliable financial reporting.
FAQS
What does a trial balance serve?
Trial balances are a crucial document for auditors and are used to create balance sheets and other financial statements.
How is trial balance determined?
Total Debits minus Total Credits is the trial balance formula. This equation guarantees that the totals in the credit and debit columns are equal.
What are the accounting tenets of perfection?
Look at the first two fundamental accounting principles: Debit the recipient and credit the giver. Debit what is received and credit what is expended.
