What is a trial balance?
A trial balance is a bookkeeping worksheet in which the balance of all ledgers is compiled into debit and credit account column totals that are equal. The general purpose of producing a trial balance is to ensure the entries in a company's bookkeeping system are mathematically correct. The trial balance gives a simple way to check that every transaction includes debit and credit correspondence. This gives you the fundamental basis of your balance sheet, as well as your profit and loss account which is also known as, the income statement. You can prepare your trial balance at regular intervals to make sure your books are balanced. A company prepares a trial balance periodically. For example, many organizations use trial balance accounting at the end of each reporting period.
The purpose of a trial balance
Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system. If the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean there are no errors in a company's accounting system. For example, transactions classified improperly or those simply missing from the system could still be material accounting errors that would not be detected by the trial balance procedure.
The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
Double Entry Keeps the Accounting Equation in Balance
To illustrate double entry, let's assume that a company borrows $10,000 from its bank. The company's Cash account must be increased by $10,000 and a liability account must be increased by $10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is required. Hence, the account Cash will be debited for $10,000 and the liability Loans Payable will be credited for $10,000. Double entry also means that the accounting equation (assets = liabilities + owner's equity) will always be in balance. In our example, the accounting equation remained in balance because both assets and liabilities were each increased by $10,000.
Requirements for a Trial Balance
Companies initially record their business transactions in bookkeeping accounts within the general ledger. Depending on the kinds of business transactions that have occurred, accounts in the ledgers could have been debited or credited during a given accounting period before they are used in a trial balance worksheet. Furthermore, some accounts may have been used to record multiple business transactions. As a result, the ending balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered into that account based on all related business transactions.
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The writer of this blog is, Jory Mirtil. He works at Thaddeus as an Accounting Intern. He chose Thaddeus because of the work environment and the mission it stands for. He is someone who aspires to be an Accountant one day. His career path journey will involve a ton of work experience and education in accounting in order to reach my dream to become a CPA.