What is a trial balance and how does it work?
What is a trial balance?
A trial balance is a crucial compilation of your company’s debits and credits that can be pulled at any time, letting you check your financials, spot any errors, and fix them before moving on. Whether it’s the end of the financial year, audit time, or you want a glimpse into the current state of your general ledger, a trial balance is a valuable financial accounting tool, and it’s essential as part of a double-entry accounting system.
A trial balance summarises all the numbers in your company’s financial records for a certain period. It acts as an internal audit for double-entry accounting systems by compiling all general ledger account totals – assets, liabilities, expenses, income and equity – and splitting these across two columns: debit or credit, depending on the transactions in and out of each account. For financials to balance, the total of each column (debit and credit) should be equal.
What is the purpose of a trial balance?
A trial balance checks that your financials are balanced when operating a double-entry accounting system. It ensures that all transactions in your general ledger have been entered accurately. It is often the first step before preparing official financial statements, such as monthly management reports, an audit or finalising the accounts at the end of the financial year. It’s a red flag to identify errors and lets you fix any inaccurate entries before proceeding.
It’s a simple way to check that every transaction includes both a debit and a corresponding credit.
How does a trial balance work?
A trial balance generally looks at all transactions that are allocated under these five categories:
Balance Sheet categories
Assets
Liabilities
Equity
Profit & Loss categories
Revenue
Expenses
Each transaction that has been allocated to an account under these categories will impact the total debits and credits for each account and is then summed to prepare the trial balance. If the sum of debits does not equal the sum of credits, the trial balance indicates an error has occurred.
What are the different types of trial balances?
There are three main types of trial balance. While all follow the same format, they are used in slightly different circumstances:
The unadjusted trial balance
This is effective for a quick spot-check or starting point to analyse your accounts. It’s a record of day-to-day transactions that can be used to balance your ledger by adjusting journal entries.
The adjusted trial balance
Once your financials are balanced, an adjusted trial balance can be used to prepare official financial statements.
The post-closing trial balance
This report checks the accuracy of closing entries and shows everything is balanced before the next accounting period. It acts as the starting trial balance for the next financial year.
Rules and requirements of a trial balance
Trial balances follow one cardinal rule, which is summarised in the following equation:
Total Debit Entries = Total Credit Entries
Additionally, there are three critical requirements that a trial balance must incorporate:
All liabilities must be reflected on the credit side, and assets must be reflected on the debit side.
Gains and income must be reflected on the credit side.
Expenses must be reflected on the debit side.
Trial balance format
As shown in the example above, trial balances are consistently formatted with three columns and generally prepared in a spreadsheet such as Excel (or pulled from accounting software).
The first column details accounts pulled from your general ledger, and the other two columns are the credit and debit balances. This format is clean, simple and easy to read.
In addition, a trial balance needs to include the following:
Name of the entity
Accounting period end for which the trial balance has been prepared
Account title showing the name (and number) of the ledgers from which the figures have been extracted
Debit entries on the left side
Credit entries
Total sum of all debit and credit balances at the bottom of their respective columns
Trial balance vs balance sheet: what are the key differences?
The key differences between a trial balance and a balance sheet are in their formats and purpose, as outlined below:
Trial balance
Typically, an internal document (or used by auditors)
Lists the end balance of every account – can be very detailed
No rigid format aside from debit/credit columns
May be completed as often as a company requires. It can track finances throughout the year.
Balance sheet
Formal document shared externally, often requiring the signature of an auditor
Rigid format, must comply with relevant accounting standards for Australia or New Zealand
Prepared annually as a legal statement at the end of a financial year
Groups several accounts into one figure
Required to manage company finances
Trial balance FAQs and other resources
What is the difference between a general ledger and a trial balance?
A general ledger contains detailed information on all transactions, whereas a trial balance summarises the ending balance of each account recorded in the general ledger.
Is a trial balance debit or credit?
A trial balance summarises both. It consists of two columns – one for debit and one for credit.
Why are expenses debited in a trial balance?
Expenses are debited as they decrease equity.
What should you do if a trial balance doesn’t balance?
An imbalance indicates an error in your entries that needs further investigation. Once rectified, you should recalculate your trial balance.
Are there any limitations of a trial balance?
While the trial balance can appear fully balanced, it doesn’t guarantee 100% accuracy of the accounts. For example, it won’t pick up missed transactions, amounts entered incorrectly or duplicated postings, although the totals may match.
Get help with trial balances from MYOB
Trial balances are an essential tool for balancing your company’s financials. They help you identify errors early, provide crucial insight throughout the year, and are a critical first step in preparing accurate end-of-financial-year statements.
MYOB’s accounting software has financial reporting capabilities, so you can quickly and easily generate and customise trial balance reports with the click of a button. Get started today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.