A trial balance is an accounting statement the is utilized in a double-entry accounting system. The report totals all debits and credits and is used to identify any recording errors. It is often prepared towards the end of the accounting period after numerous entries have been posted. It is a common function of modern accounting software to create, update and report a trial balance automatically.
Reading a Trial Balance
A trial balance is laid out in a specific manner. To the left, a list of accounts are shown. These accounts may be listed in order of type of account (assets followed by liabilities followed by revenue, for example). However, these accounts are not aggregated by classification and blend into each other. Towards the right, a column aggregates the debit for each account followed by a column aggregating the credit balance for each account. A total of both columns is indicated at the bottom of the report; if the two totals are not equal, an entry error has been posted.
Adjusted Trial Balance
An adjusted trial balance can reflect changes made to an unadjusted original trial balance. This is reflected by adding columns to the right side of the report. Two columns are added: one to show the change in debits and one for the change in credits. A new grand total is reported in new columns. Use an adjusted trial balance during your month-end closing period to follow what work has already been entered into the statements.
Advantages of Trial Balance
A trial balance is mainly used to check for errors. Software errors in entering or posting journals will be caught if both sides of the journal were incorrectly posted. The trial balance is used to prepare adjusting entries; after these adjustments are made, another trial balance is created that includes new columns that show what changes were made. Therefore, a trial balance can be used to track changes in specific accounts. In addition, it can easily identify whether activity has been posted in accounts that are not to be used.
Another main element of a trial balance is the ease of information presentation. It is a location where all accounts are reported in a single place with all balances. This information is used to prepare the financial statements. Use a trial balance to check account balances and make sure all ending balances are reasonable and reported correctly.
Limitations of a Trial Balance
A trial balance is limited in certain respects. It does not specifically identify what the error is; instead, it simply reports whether a total balance is correct or incorrect. In addition, a trial balance only checks aggregated totals, so it will not identify when journal entries are recorded using incorrect amounts on both sides. For example, assume a manual adjustment is made and the dollar amount of both the debit and credit is $500. However, the dollar amount should be $300. A trial balance will not identify this $200 mistake.