How to prepare and use a trial balance

Rerun the trial balance after making adjusting entries and again after making closing entries. Common types of account totals for income statement accounts are credits for sales and other types of revenue and debits for cost of sales and expenses. Gain accounts typically have credit balances, whereas loss accounts typically have debit balances. A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. A company prepares a trial balance periodically, usually at the end of every reporting period.

• A trial balance should not be confused with an actual balance sheet.
• Nevertheless, once the trial balance is prepared and the debits and credits balance, the next step is to prepare the financial statements.
• To get the numbers in these columns, you take the number in the trial balance column and add or subtract any number found in the adjustment column.
• A company prepares a trial balance periodically, usually at the end of every reporting period.
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• A trial balance is a list and total of all the debit and credit accounts for an entity for a given period – usually a month.

Nevertheless, once the trial balance is prepared and the debits and credits balance, the next step is to prepare the financial statements. A trial balance is a worksheet with two columns, one for debits and one for credits, that ensures a company’s bookkeeping is mathematically correct. The debits and credits include all business transactions for a company over a certain period, including the sum of such accounts as assets, expenses, liabilities, and revenues. Trial Balance only confirms that the total of all debit balances match the total of all credit balances. An example would be an incorrect debit entry being offset by an equal credit entry.

Who Uses the Trial Balance?

Accounting software and ERP systems often generate trial balance reports. Some small businesses less efficiently use Google Sheets or Excel worksheets or templates for preparing their trial balance documents. If the trial balance doesn’t balance, your accounting team should investigate and correct errors. Scan and review the trial balance for reasonableness to detect errors. During the accounting close process, check that the trial balance line items are included in the general ledger. Each month, you prepare a trial balance showing your company’s position.

You then add together the $5,575 and $4,665 to get a total of $10,240. If you review the income statement, you see that net income is in fact $4,665. The last two steps in the accounting process are trial balance example preparing a trial balance and then preparing the balance sheet and income statement. This information is provided in order to communicate the financial position of the entity to interested parties.

Example of an Adjusted Trial Balance

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 that there are no errors in a company’s accounting system. For example, transactions classified improperly or those simply missing from the system still could be material accounting errors that would not be detected by the trial balance procedure.

The trial balance simply records all of the transactions listed in your general ledger accounts on a separate spreadsheet so you can ensure that your journal entries are balanced and accurate. In addition to error detection, the trial balance is prepared to make the necessary adjusting entries to the general ledger. It is prepared again after the adjusting entries are posted to ensure that the total debits and credits are still balanced. It is usually used internally and is not distributed to people outside the company.

Limitations of a trial balance

If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000. Remember that the balance sheet represents the accounting equation, where assets equal liabilities plus stockholders’ equity. Finding discrepancies like this is why you created a trial balance, and discovering the error now can save you time and headaches later on. If you’ve followed the above method, you can simply and quickly calculate all of the credit balances in your credit entry column. If you’re preparing your trial balance with a spreadsheet software program like Microsoft Excel, you can insert a formula that will perform the calculation for you.