What is a Trial Balance?
A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain point in time. The accounts reflected on a trial balance are related to all major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to identify the balance of debits and credits entries from the transactions recorded in the general ledger at a certain point in time.
Below is an example of a Company’s Trial Balance:
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 not an official financial statement. It is usually used internally and is not distributed to people outside the company.
What does a trial balance include?
A trial balance includes a list of all general ledger accounts totals. Each account should include an account number, description of the account, and its final debit/credit balance. In addition, it should state the final date of the accounting period for which the report is created. The main difference from the general ledger is that the general ledger shows all of the transactions by account, whereas the Trial Balance only shows the account totals, not each separate transaction.
Finally, if some adjusting entries were entered, it must be reflected on a trial balance. In this case, it should show the figures before the adjustment, the adjusting entry, and the balances after the adjustment.
Undetectable errors in a trial balance
A trial balance can trace the mathematical inaccuracy of the general ledger. However, there are a number of errors that cannot be detected by this report:
- Error of omission: The transaction was not entered into the system.
- Error of original entry: The double-entry transaction includes the wrong amounts on both sides.
- Error of reversal: When a double-entry transaction was entered with the correct amounts, but the account to be debited is credited and the account to be credited is debited.
- Principle error: The entered transaction violates the fundamental principles of accounting. For example, the amount entered was correct and the appropriate side was chosen, but the type of an account was wrong (e.g., expense account instead of liability account).
- Commission error: The transaction amount is correct, but the account debited or credited is wrong. It is similar to the principle error described above, but commission error is usually a result of oversight, while principle error is a consequence of a lack of knowledge of accounting principles. You can learn the Fundamentals of Accounting with CFI’s Free Course!
CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)™ designation for financial analysts. From here, we recommend continuing to build out your knowledge and understanding of more corporate finance topics such as: