What is the procedure for preparing a trial balance?

Preparing and adjusting trial balances aid in the preparation of accurate financial statements. Although you can prepare a trial balance at any time, you would typically prepare a trial balance before preparing the financial statements. The entrepreneur/learner should recall that in the accounting cycle, once the ledger accounts have been established and balances extracted, the next step is to prepare a trial balance. A trial balance is a summary of all the transactions which took place within a specified financial period. A trial balance is simply a financial statement which depicts the summary of debit and credit balances for all accounts. The unadjusted trial balance is prepared by compiling a list of all the general ledger account balances as of a certain date.

For example, if a journal entry has been omitted, the debit and credit columns of the trial balance will still agree. A trial balance is a statement prepared to ensure that the transactions for a period have been duly recorded in the journal and properly posted to the relevant ledger accounts. The basic purpose of preparing a trial balance is to test the arithmetical accuracy of the ledger.

When Trial Balance Totals Do Not Agree

When your Preparing A Trial Balance makes a purchase – like a computer for a new employee – you will record this as a journal entry into your accounting software. So the cost of the computer ($1000) will go into the credit balance as a purchase (- $1000) and then into the debit balance too because it is a new asset for your company (+ $1000). As you can see, the report has a heading that identifies the company, report name, and date that it was created.

It is made up of three parts, namely; particulars column, debit column and credit column. The particulars column entails a short narration of the name of the account with either a debit or credit value. The financial statements are significant documents that capture the financial state of a company at a given point in time. They’re helpful for analyzing how a company has grown since the earlier period, and are useful for outside investors to determine if the company makes a prudent investment. A balance sheet, on the other hand, lists the assets, liabilities and equities for a single point in time. Although it serves as an important internal document, its central purpose is to communicate a company’s financial health to investors and stakeholders outside the company.

Errors Not Detected by a Trial Balance

Well, as you know, accounting/bookkeeping is all about balancing. The accounting equation needs to balance, every transaction needs to be balanced, our debits and credits need to be balanced and so on. Discover the meaning of a journal entry and a trial balance, types of journal entries, how a general ledger differs from a trial balance, and some examples. A wrong entry in a subsidiary book – If a credit purchase of $ 450 from James is wrongly written as $ 540 in the purchase book, such an error will not be disclosed. The posting on both the debit side of the purchase account and the credit side of the account of James will be with the wrong amount of $ 540, so the trial balance will agree.

• Here are some instances of errors in the trial balance.
• If there is a difference, accountants have to locate and rectify the errors.
• Journal entries are wrongly posted in ledger accounts.
• The debit and credit columns of the trial balance have been totaled wrong.
• The trial balance is now ready for use in the preparation of financial statements.