If you’re running a business, you need to have an understanding of what a trial balance is. It helps you see where your business stands financially.
The main purpose of a trial balance is to ensure that bookkeeping entries are correct. But it’s also worth extending your knowledge to how it paints an overall picture of your business’s accounts.
Read on to see an example of a trial balance and how to prepare one for your business.
What Is a Trial Balance and Its Importance For a Business
A trial balance is attributed to the double-entry accounting system. It’s a recording of all the debit and credit transactions of a business where both data should be equal.
A trial balance is to confirm that all recorded debits and credits are correct. It also serves as a review stage to point out discrepancies and rectify them. It’s usually the first stage of preparing official financial records and statements.
A trial balance is only used internally in a business and doesn’t have to be presented in the closing financial documentation. It’s worth noting that a trial balance differs from a balance sheet, as the latter is something that is distributed outside of the accounting team, and sometimes the business.
Having a healthy financial ‘bottom line’ in a business is crucial. And the preparation of a trial balance allows you to compare current ledger balances with balances in the past. It also assists with getting financial accounts ready, undertaking comparative analysis, making financial adjustments, and maintaining accounting accuracy. They’re also an important document for auditors.
How to Prepare a Trial Balance
Preparing a trial balance varies among businesses – depending on the size and the accounting system/software used. But here’s a basic run-through of what is included in a simple trial balance.
Recording in ledger
When your business makes a purchase – like a computer for a new employee – you will record this as a journal entry into your accounting software. Remember, it needs to be a double-entry. 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).
This is something you or your accountant will complete every time there’s a transaction made by your business.
Debit ledger: assets, expenses and receivables
Credit ledger: liabilities, incomes and payables
Balance your accounts
The first step in balancing your accounts is called an unadjusted trial balance sheet, as it will be your initial review before any corrections are made.
(Depending on the kind of accounting system you use, a trial balance can easily be carried out in an excel spreadsheet.)
What you’re going to do is to import three columns of data into a new sheet:
- Name of each transaction
- Debits (which could also be called accounts receivable)
- Credits (which could also be called accounts payable)
At the bottom of the debit and credit column, calculate the total sum of all entries.
Aim for zero ending balance
Your end goal is to come up with zero finances to balance i.e. both the sums of debit and credit are the same – with no surplus or deficit. If this isn’t the case, then somewhere along the way, a business transaction hasn’t been recorded accurately.
If your credit and debit columns aren’t the same, then you’ll have to review all your previous transactions to find out where errors may have occurred. There could be a few reasons for this:
- Entry into the wrong column (debit vs. credit)
- Record made twice
- Overlooked invoice
- Entry into the wrong account
- Manual entry mistake
- Error when transferring information to the trial balance
Once discrepancies have been corrected, you can add them to the worksheet and update the trial balance sheet (and it is now called an adjusted trial balance).
Understand the limits of a trial balance
Despite a trial balance being an important accounting function of a company, it does come with limitations.
Errors can be made. But if they’re offset with another mistake that balances the total debit and credit (such as those entered into the wrong accounts) – it is unlikely to be picked up, as the trial balance will still show zero. So, you can’t rely on a trial balance to reveal every issue in your business accounts. That’s why accurate recording is very crucial and perhaps checking your trial balance regularly until you’re able to nail down your processes.
Example of a trial balance
Keen to see how a basic trial balance may look? Here’s an example for the Future Tech company.
For a larger organisation, a trial balance wouldn’t include every transaction. It would use the total from all recorded assets, liabilities, equity, revenue and expenses over a specific time period.
Get a clear picture of your business accounting
A trial balance is an important ‘wrap-up’ of your accounting records. It allows you to check the financial status of your business and enables you to resolve any issues/missed transactions that could impact your financial bottom line.
As you streamline your finances, it also makes sense to do the same on how you’re growing your business. And in this digitally-enabled customer landscape, you should look into the best digital tools, such as a brandable domain name and reliable hosting, that let you win online.