2021-01-18 20:52:44ExpensesEnglishAll you need to KNow about Trial Balance: The very purpose you prepare a trial balance is to verify the correctness of your double-entry...https://quickbooks.intuit.com/global/resources/row_qrc/uploads/2020/09/balance-sheet-template.pnghttps://quickbooks.intuit.com/global/resources/expenses/trial-balance/Trial Balance: post closing, adjusted Trial Balance Examples

Trial Balance: post closing, adjusted Trial Balance Examples

15 min read

It is important for your business to calculate the balance of each account at the end of each financial year. An account’s balance refers to the total of such an account to date. For instance, total sales made, total wages paid, etc.

You record such balances in ledger accounts. Then, you balance each account once you record all the transactions in the ledger.Following this, you prepare a Trial Balance statement using balances from each of the ledger accounts. The very purpose you prepare a trial balance is to verify the correctness of your double-entry bookkeeping.

Double-entry bookkeeping is an accounting system that records each of your business transactions into at least two different accounts. That is, each of your business transactions has an equal and opposite effect in a minimum of two different accounts. Thus, to check if the debit or credit amounts you record in the ledger are accurate, you need to prepare the trial balance.

So, let’s understand what is a trial balance, the advantages of trial balance, and errors in a trial balance.

What is a Trial Balance?

Trial Balance Definition

Trial Balance is a tool to check the accuracy of the debit and credit amounts that you record in various ledger accounts. It is generally a statement that represents the total of debits and credits of all your ledger accounts. You prepare such a statement to verify the arithmetical accuracy of posting various journal entries in your ledger accounts.

Therefore, Trial Balance is an important accounting statement as it showcases the final status of each of your ledger accounts at the end of the financial year. These final balances help you to prepare final accounts like the Profit and Loss Statement and Balance Sheet.

Thus, it becomes easy for you to prepare the basic financial statements. This is because you take the final balances from the trial balance itself. That is, you do not have to go through the hassle of checking each and every ledger account.

Typically, you prepare the trial balance sheet at the end of the financial year. However, you can choose to prepare a trial balance at the end of a month, quarter, half-year, or a year.

Concept of Trial Balance

As mentioned earlier, you prepare a Trial Balance Sheet to check the arithmetical accuracy of your ledger accounts. To ascertain the accuracy of various ledger accounts, you need to locate errors and in return rectify such errors.

Further, you need to prepare basic financial statements like the income statement and balance once the accounts are tallied in the trial balance sheet.This means you need to follow the steps below to undertake the trial balance accounting.

  • determine balances of each of the ledger accounts
  • record each ledger account in the debit or the credit column of your trial balance sheet. Say any of your ledger accounts have a nil balance. In such a case, you must record such an account as nil or zero in your trial balance sheet.
  • calculate the total of your trial balance sheet’s debit column
  • compute the total of your trial balance sheet’s credit column
  • verify that the total of your trial balance’s debit column equates to that of its credit column. Further, determine the errors in case the debit or the credit balances do not tally. You must note that all assets, expenses, and receivables accounts have debit balances. Whereas, all the liabilities, revenues, and payables accounts have credit balances.

Trial Balance Example

Watson Electronics ledger shows the following accounts at the end of December 31, 2019.

Watson Electronics Ledger Accounts

Watson Electronics Capital Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
31/12/2019To Balance c/d$60,0001/1/2019By Balance b/d$40,000
By Cash$20,000
$60,000$60,000
1/1/2020By Balance b/d$60,000

 

KG Ltd Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
To cash$40,0001/1/2019By Balance b/d$10,000
31/12/2019To Bal c/d$20,000By Purchases$50,000
$60,000$60,000
1/1/2020By Balance b/d$20,000
Machinery Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
1/1/2019To Bal b/d$20,000By Depreciation$3,000
31/12/2019By Bal c/d$17,000
$20,000$20,000
1/1/2020To Bal b/d$17,000
Bob & Co’s Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
1/1/2019To Bal b/d$15,000By Cash$55,000
To Sales$60,00031/12/2019By Bal c/d$20,000
$75,000$75,000
1/1/2020To Bal b/d$20,000
Sales Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
By Bob & Co$60,000
By Cash$10,000
$70,000
Cash Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
1/1/2019To Bal b/d$15,000By KG Ltd$40,000
To Capital$20,000By Wages$5,000
To Bob & Co$55,000By Purchases$12,000
To Sales$10,00031/12/2019By Bal c/d$43,000
$100,000$100,000
1/1/2020To Bal b/d$43,000
Wages Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
To Cash$5,000
$5,000

 

Depreciation Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
To Machinery$3,000
$3,000
Purchases Account
Dr.Cr.
DateParticularsAmount (USD)DateParticularsAmount (USD)
To KG Ltd$50,000
To Cash$12,000
$60,000

Watson Electronics Trial Balance

The Trial Balance of Watson Electronics as of December 31, 2019, would be as follows.

Trial Balance of Watson Electronics On December 31, 2019
ParticularsDebit Total (in USD)Credit Total (in USD)
Watson Electronics Capital account$60,000
KG Ltd’s account$20,000
Machinery$17,000
Bob & Co$20,000
Sales$70,000
Cash$43,000
Wages$5,000
Depreciation$3,000
Purchases$62,000
Total150,000150,000

Advantages of Trial Balance

Trial Balance is a statement that helps you to verify the accuracy of your ledger accounts. Thus, it is an important statement in the accounting process. Thus, it is an important statement in the accounting process. This is because it not only helps in determining the final position of various accounts. But it also helps in preparing the basic financial statements.

Thus, a trial balance helps you in the following areas.

  • Determining the Accuracy of Ledger Accounts

The very objective of preparing a trial balance is to determine whether all your debit or credit entries are recorded properly in the ledger. Thus, it provides the summary of your general ledger accounts as it showcases the accounts and their balances. So, your financial transactions are recorded accurately in the general ledger accounts if the debit column of your equates to its credit column. In other words, your accounts have been balanced out correctly arithmetically.

However, you must note that simply tallying the trial balance accounts does not mean that your accounts are accurate. It just means that the debit and the corresponding credit of various financial transactions have been recorded properly in the general ledger.

  • Finding Errors

As stated earlier, there exist accounting errors if the debit column of your trial balance does not equate to its credit column. In other words, accounting errors occur when your trial balance sheet does not tally. Remember, accounting errors occur at any one of the stages of the accounting process. This accounting process includes the following stages.

  • totaling of the subsidiary books
  • recording journal entries into the journal ledger
  • computing balances of various accounts
  • carrying balances of accounts to the Trial Balance Sheet
  • balancing of the Trial Balance Columns

It is important to note that the balancing of the trial balance columns does not ensure the accuracy of accounts. This is because there are some errors that do not have an impact on the equality of the debit and the credit columns.

For instance, you may debit a correct balance in an incorrect account while passing a journal entry. Or recording a journal entry in the ledger. Such an account would show incorrect balances in two accounts. However, your Trial Balance Sheet would balance out. Besides such an error, there are other errors that you must rectify.

For instance, you may record an equal debit and credit of an incorrect amount. Thus, such an error would result in two accounts with incorrect balances. However, such an error would not lead to inequality in the debit and credit balance of your trial balance. Therefore, such types of errors indicate that the balancing of the Trial Balance Sheet does not imply the accuracy of the entries in the books of accounts.

  • Preparing Financial Statements

It is important for your business to prepare the trial balance sheet. This is because a correct trial balance statement helps you in preparing basic financial statements including the income statement and the balance sheet. Thus, there is no need for you to go through each of the ledger accounts while preparing financial statements. Provided you have a correct and a balance out the trial balance sheet. Thus, we can say that the first step in preparing the basic financial statements is to formulate a tallied out trial balance.

Remember, all revenue and expense accounts of your trial balance are showcased in the trading and P&L accounts. Whereas, all your assets, liabilities, and the capital accounts appearing in your trial balance are showcased in your company’s balance sheet.

  • Helps in Taking Managerial Decisions

The trial balance also helps your business’s management to undertake analysis while taking managerial decisions. That is, your company’s managers can compare the trial balances of various years and figure out changes in various balances. Some of the important accounts that your business management can track include purchases, debtors, sales, etc.

Thus, your business management can undertake comparative analysis and peer analysis with the help of the trial balance sheet. Such an analysis helps your management to understand the business trends and accordingly take the necessary actions. These decisions may be regarding your manufacturing costs, business expenses, incomes, etc.

Finally, your management can come up with the financial budget for the coming accounting period. This is after undertaking such a comparative analysis.

  • Summarizing Financial Transactions

A trial balance sheet showcases the balances of various ledger accounts. Thus, it provides you a summary of the financial transactions of your business. You prepare such a summary by transferring the balances of various income, expense, asset, liability, and capital accounts.

Such a summary helps you to locate journal entries in the original books of accounts. For instance, your company’s trial balance sheet provides an audit trail to the auditors. This helps them to carry out the audit of your financial statements. They are thus able to provide their comments with regards to the financial statements so prepared in the audit report.

Uses of Trial Balance

A trial balance sheet is an internal report that you prepare to ensure that all the journal entries in your ledger are correctly balanced. That is, the total dollar amount of debit and credit balances in each of the accounts must match at the end of the financial period.

Thus, you use the trial balance to achieve various purposes. So, let’s try to understand the uses of the trial balance sheet.

  • Preparing a trial balance is the initial step in preparing the basic financial statements. These statements include trading and P&L accounts and the balance sheet of your company.
  • It helps you to identify and rectify errors. You achieve this by tallying the debit column with the credit column of your company’s trial balance. In case these columns do not match, it means there exists an accounting error.
  • Trial balance helps you to ensure the arithmetical accuracy of your general ledger accounts.
  • It gives you a snapshot of the accounting transactions of your business to the accountants and auditors.
  • You can easily make adjustments to your accounts in case there are any errors.

Undetectable Errors in a Trial Balance

It is important for you as a business to tally your trial balance sheet. This means that both the debit and the credit journal entries for each of your financial transactions have been recorded correctly. However, the balancing of your trial balance does not imply that your accounting records are accurate.

A tallied trial balance indicates that the posting of the journal entries to the general ledger is arithmetically correct. Though, this does not indicate that the entry itself is correct.

Therefore, there can be accounting errors that you need to identify. In the trial balance accounting, such accounting errors can be classified into four categories.

  • Errors of Commission

These are the errors that you commit due to:

  • the incorrect posting of your financial transactions
  • wrong totaling
  • incorrect balancing of your accounts
  • the wrong casting of your subsidiary books
  • incorrect recording of the amount in your books of the original entry (journal)

Say for instance Watson Electronics paid $25,000 to Bob & Co who is the supplier of goods. Now, you correctly record this transaction in your cash book. However, you debit Bob & Co’s account with $2,500 only while posting this transaction to the general ledger. Such an error refers to the error of commission. Thus, we can say that the error of commission is clerical in nature. Most of these errors impact your trial balance sheet.

  • Errors of Omission

The errors of omission refer to the errors that you may commit while recording the financial transactions in the journal. Or at the time of posting such a transaction to your general ledger. Now, the errors of omission can be of two types.

  • The error of complete omission
  • The error of partial omission

So, you commit an error of complete omission in case you completely omit to record a transaction in the journal. For example, you did not record the credit sales made to KG Ltd worth $10,000 in your sales book. In this case, you commit an error of complete omission. However, say you partly omit to record a financial transaction in your books of accounts. This is referred to as an error of partial omission. For instance, you do not post the credit sales made to KG Ltd worth $10,000 in your sales book. In this case, you commit an error of complete omission. However, say you partly omit to record a financial transaction in your books of accounts. This is referred to as an error of partial omission. For instance, you do not post the credit sales made to KG Ltd worth $10,000 in KG Ltd’s account. This would be an error of partial omission.

  • Errors of Principle

You record accounting entries in accordance with the Generally Accepted Accounting Principles (GAAP). However, you tend to commit an error of principle if you ignore or violate any of these accounting principles. For instance, you may commit an error of principle if you incorrectly classify an expenditure or a receipt between capital and revenue accounts. Committing such an error would certainly impact your financial statements. That is, such an error would lead you to understate or overstate income, assets, liabilities, etc.

Thus, you must treat the amount spent on any addition made to the land and building as a capital expenditure. Further, you must debit your land or building account. However, you may wrongly treat it as a revenue expense if you debit the maintenance and repairs account with such an amount. This indicates that you committed an error of principle.
Likewise, you would commit errors of principle if you record the purchase of machinery in your purchases book.

  • Compensating Errors

You commit compensating errors if the net effect of such errors on the debit and credit balances of accounts is nil. This means the compensating errors do not impact the tallying of the trial balance.

For instance, your purchases account would showcase an excess debit of $10,000 if you overstate your purchases in the books by $10,000. Likewise, your sales return account would show a short debit of $10,000 if you understate your sales returns by $10,000. Thus, the impact of such entries would be nil on your books of accounts. This is because an increase in one account is offset by a decrease in the other. So, the net effect of both the errors is nil. And hence, your trial balance would tally.

What Does a Trial Balance Include?

A trial balance sheet includes a list of general ledger accounts along with their ending debit or credit balances. Furthermore, a trial balance also includes the account number of each of the general ledger accounts. It also includes the description of such accounts. In addition to this, your trial balance sheet also showcases the name of your entity in the title and the date of the financial period for which such a statement is prepared.

Besides this, it also shows the adjustment entries in case there are any. Further, your trial reveals the unadjusted and adjusted balances of various ledger accounts. You need to make adjustment entries in case of any accounting errors, as stated above. Remember, your general ledger accounts are recorded in the following order in your trial balance sheet.

  • Assets
  • Liabilities
  • Equity
  • Dividends
  • Revenues
  • Expenses

Further, the short-term liabilities appear before the long-term liabilities under the head ‘Liabilities’ in your trial balance. Also, the balances pertaining to assets and expenses are represented in the debit column. Whereas the balances related to liabilities, income, and equity are shown in the credit column.

Finally, the sum of the balances of all the accounts is presented at the bottom of your trial balance under the respective debit and credit columns. Thus, the trial balance is different from your general ledger. This is because your trial balance showcases the total balances of your accounts only. It does not reveal each financial transaction separately.

However, your general ledger shows each financial transaction separately by account.

FAQ:

  • What is the Purpose of the Adjusted Trial Balance?

The adjusted trial balance is a trial balance sheet that reveals the closing balance of all your general ledger accounts. This is after passing the adjusting entries. The very purpose of adding these adjusted entries is to rectify the accounting errors in your unadjusted Trial Balance. In other words, your adjusted trial balance verifies that all your debit balances of accounts equate to their credit balances. Furthermore, an adjusted trial balance also helps you to prepare financial statements that comply with the accounting principles.

  • When is the Adjusted Trial Balance Prepared?

You prepare an adjusted trial balance to verify the accuracy of posting into the general ledger accounts. This is after making the adjusting entries. Thus, an adjusted trial balance is the second trial balance in the accounting process. You prepare such a statement to verify whether the debit balances of accounts equate to their credit balances. Once you prepare the adjusted trial balance, the balances of some of the items in the unadjusted trial balance would change.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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