Trial balance: Definition, purpose, and example

Numbers don't lie, especially in accounting. Before computers, a ledger was the main tool for ensuring debits and credits were equal. A key part of ensuring accounting accuracy is the trial balance.

It’s one of the first lines of defense against accounting errors and a pivotal report within double-entry bookkeeping. Business owners need to know how trial balances work. Let’s look at what a trial balance is, how it works, the various types, and examples. 

What is a trial balance?

A trial balance is an accounting report you put together at the end of an accounting period to ensure the general accounting ledger is correct and  the total debits match the total credits. 

The biggest goal of a trial balance is to find accounting errors and transposition errors like switching digits. By highlighting these mistakes, the trial balance acts as an accuracy check for a business, mitigating the risk of inaccuracies before you generate final financial statements. 

Trial balance vs. balance sheet

A trial balance is an internal report that itemizes the closing balance of each of your accounting accounts. It acts as an auditing tool, while a balance sheet is a formal financial statement.

The trial balance shows all of your accounting accounts, but a balance sheet may consolidate many of these accounts. For example, all of your bank accounts, such as your operating and payroll checking accounts and savings accounts, will appear in the trial balance. However, your balance sheet will likely group all of these accounts under “cash and cash equivalents.”

How a trial balance works

The trial balance gathers all your general ledger accounts. When you put together your trial balance, usually at the end of an accounting period, you’ll create three columns: 

1. Account names 
2. Debit balances
3. Credit balances 

Within the trial balance, debit balances typically feature asset and expense accounts, while credit balances represent the company's liabilities, capital, and revenue. 

A trial balance is a key step in the accounting cycle. You record all your accounting transactions and post them to the general ledger, then assess the debit and credit totals.

Each account with a balance in your accounting system, such as accounts receivable and accounts payable, appears in the trial balance with its respective balance–debits on the left and credits on the right. 

Types of trial balance

Trial balances come in three key types, with each serving a purpose to help create accurate financial statements. 

Here are the three types of trial balances: 

1. Unadjusted trial balance: This is the Initial trial balance directly from ledger accounts. It helps detect errors and omissions before making any account adjustments.
2. Adjusted trial balance: This happens after incorporating adjusting entries to reflect changes for accrued and deferred items. It corrects misstatements found in the unadjusted version. 
3. Post-closing trial balance: This comes after closing entries and zeroes out temporary accounts like revenues and expenses.

While an unadjusted trial balance may uncover mathematical errors, the following types help in eliminating accounting errors and ensuring accurate financial statements. 

When to use trial balances

A trial balance plays a major role in the accounting cycle, notably at the end of an accounting period before generating financial statements.

The trial balance is critical at four specific stages:

1. End of an accounting period: Such as a month, quarter, or year, to ensure that all transactions have been accurately recorded in the general ledger. This is typically step four of the accounting cycle. 
2. After adjusting entries: These entries update accounts for accruals, deferrals, depreciation, and other adjustments necessary to match revenues and expenses to the appropriate period. You’ll typically do this after step six of the accounting cycle but before step seven. 
3. After closing entries: Closing entries transfer the balances of temporary accounts, like revenue, expenses, and dividends, to the retained earnings or owner's equity account. This is typically part eight of the accounting cycle. 
4. Periodically: Some businesses create trial balances periodically to monitor the accuracy of their financial records and identify any errors or discrepancies.

Most accounting software will let you generate a trial balance at any point in time to allow you to assess the current state of your accounts. 

Pros and cons of a trial balance

The trial balance is a mathematical proof test to make sure that debits and credits are equal. 

The biggest benefits of trial balances are that they:  

• Make reviewing general ledger account balances easier 
• Ensure debits and credits match 
• Help with finding discrepancies before creating financial statements  

By providing a snapshot of all ledger accounts within a given accounting period, the trial balance helps business owners and accounting teams in reviewing accuracy. 

However, trial balances do have some shortcomings, as they:  

• May exclude necessary accounts 
• Miscoded transactions 
• Fail to detect some accounting errors 

Note that while a trial balance is helpful in the double-entry system as an initial check of account balances, it won’t catch every accounting error.

It might miss transactions omitted entirely from the books. There's also a chance it'll fail to flag entries incorrectly coded to the wrong accounts, which can ultimately lead to inaccurate financial statements.

Example of a trial balance

A trial balance contains all ledger accounts a company uses. The typical trial balance format includes a column for the account name, one for debit balances, and one for credit balances. For example:

Notice the middle column lists the balance of the accounts with a debit balance, while the right column has balances for credits. 

The totals for the debits and credits should match. A balanced trial balance hints at no apparent accounting error, whereas discrepancies imply an error somewhere in the account balances. 

Streamline your accounting and save time

Business owners and accounting teams rely on the trial balance to create reliable financial statements. A trial balance ensures the accuracy of your accounting system and is just one of the many steps in the accounting cycle. 

However, most businesses can streamline this cycle and skip tedious steps like posting transactions to the general ledger and creating a trial balance. Using accounting software like QuickBooks Online can do all these tasks for you behind the scenes.

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