Trial balance is a core part of accounting. Without it, it is impossible to prepare certain reports in the correct manner. The list shows every account of a company that transactions were recorded in a period. In this article, let’s go through its meaning and explain more about it.
Definition of Trial Balance
A trial balance is a list of balances of all accounts that financial transactions occurred in a period to test the mathematical accuracy of the ledger. It can also be defined as a spreadsheet showing the debit and credit accounts balances for transactions that took place within a period to test the arithmetical accuracy of the ledger accounts.
A list of balances. Before the invention of computer-based accounting applications, trial balances were lists of balances in a paper. In those days, the bookkeeper will post transactions to the ledger book. At the end of the day or month, the bookkeeper will balance each account in the ledger and transfer the balances to the trial balance. However, with MS Excel, Quickbooks, Sage among others the trial balance is automatically updated daily.
Test of accuracy. The first goal is to test the accuracy of the ledger accounts. There are various types of accuracy to test here. However, the accountant or auditor will know at first glance if the trial balance is mathematically accurate. If the debit and credit sides have equal amounts, it is said that the trial balance is accurate. However, this does not imply that there is no error in the accounting books. Why? Some errors do not affect the trial balance.
Ledger accounts. The ledger accounts entered in a trial balance are those with transactions for that period under consideration. These are accounts of assets, expenses, income, liabilities, and capital. Generally, accounts are classified as personal and impersonal accounts. When it is accurate, it means that all accounts were posted correctly applying the double-entry principles. However, this doesn’t mean that there is no fraud or errors. Normally, an internal control officer will call over previous days’ work to check for errors. Any errors detected are corrected immediately.
Importance of Trial Balance
It is used to checkmates the arithmetical accuracy of the ledger accounts. It is necessary for another reason. It is required in preparing final accounts. This includes the statement of financial position, statement of profit or loss, statement of changes in equity, and cash flow statement (indirect method).
It makes preparing financial statements easy. How? A multinational company can combine several trial balances. These balances are from offices in different countries. This is true with small businesses with several branch offices as well. And can be used to detect errors. If the debit and credit sides have different amounts, it is a sign of error that must be located and corrected.
Finally, a trial balance is a set of balances of the individual accounts of an entity. It is used to checkmate the arithmetical accuracy of the general ledger. More so, financial statements are prepared and presented from it.