A trial balance (TB for short) is a list of all the account balances in the accounting records and is used to check the correctness of the bookkeeping entries.
Under the double entry bookkeeping method for every debit there should be a credit so a list of all the balances in the accounting records should balance.
Until a trial balance balances you cannot start the preparation of the Financial Statements. It is important to realize that although a Trial Balance may in fact balance, there may still be errors in the accounting records.
How do you Prepare a Trial Balance?
There are two main methods of preparing a trial balance
- Using Totals – in this method the totals of the debit side of the account are entered in the debit side of the trial balance, and the totals of the credit side of the account are entered into the credit side of the Trial Balance.
- Using Balances – the more usual method is that each individual account is totalled to give a net debit or credit balance on the account, the balance is then entered on the debit or credit side of the Trial Balance as appropriate.
The two columns should be equal or there is an error in the accounting records or the TB preparation.
Why do you need a TB?
The TB is the starting point for the production of the Financial Statements. It is a basic check to ensure that your accounting records balance, that the Accounting Equation has been satisfied, and that every debit had a corresponding credit. If the TB does not balance, assuming it has been prepared properly, it means there is an error in the accounting records.
The balancing of the TB does not however mean that the accounting records are correct, it simply means that for every debit there was a corresponding credit. It does not tell you that the debits and credits are correct or whether both sides of an entry have been completely missed out of the accounting records.