What is a Trial Balance? A trial balance is an accounting report that displays the totals of every bookkeeping ledger account at a point in time.
In the days of manual processing, every transaction was written to an individual ledger (a page in an accounts book). Each ledger was then totalled with either a debit or credit balance, and recorded in its position of either a debit or credit and the debit and credit columns are totalled up.
If the company's bookkeeping systems are mathematically correct then the totals of both columns should be exactly the same, or "balance".
Why does this matter? The double entry system of accounting is an internal check that ensure your financial records are correct. Good accounting systems like Xero, still do this process — you just can’t see it happening.
For every transaction there is a counter balancing transaction. For example, if you spend money on rent, rent expenses will increase and the bank account decreases.
What is the Purpose of a Trial Balance?
Digital accounting packages do not allow users to enter unbalanced entries into the general ledger. In general, this means that a trial balance is rarely used by businesses that have a computerised system, but it is still there.
However, auditors (and many accountants) still use the trial balance to check that everything is recorded.
It is also the basis for generating the full financial reports — every line on the trial balance must have a place on either the Profit & Loss Statement or the Balance Sheet to ensure everything is disclosed.
What Are the Limitations of a Trial Balance?
A trial balance is great for checking the general ledger arithmetic and to produce financial statements, however a trial balance has its limitations.
A trial balance will not detect:
- The complete omission of a transaction, because neither a debit nor a credit is made.
- The posting of a debit or credit to the correct side of the ledger, but to a wrong account.
- Compensating errors (e.g. an error of $300 is cancelled by another $300 error elsewhere).
- Errors of principle, e.g. cash from receivables being debited to receivables account and credited to cash at bank instead of the other way around.
What's the Difference Between a Trial Balance & a Balance Sheet?
A trial balance is a listing of all the accounts in the general ledger and their balances. Debit balances are entered in one column and credit balances are entered in another.
A balance sheet is one of the financial statements that is generated to explain the business performance and health.
The balance sheet presents a company's financial position at the end point in time.
The balance sheet is organised into sections or classifications such as current assets, long-term investments, property, plant and equipment other assets, current liabilities, long-term liabilities and stockholders' equity.
Only the asset, liability, and stockholders' equity account balances from the general ledger or from the trial balance are then presented in the appropriate section of the balance sheet.
The balance sheet is also referred to as the statement of financial position.
Engine Room Chartered Accountants Tauranga & Pukekohe
As a business owner if you're noticing that your numbers no longer add up, or if you're beginning to feel stuck and weighed down by all your bookkeeping responsibilities, then contact the team at Engine Room Chartered Accountants in Tauranga or Pukekohe.
At Engine Room Chartered Accountants we are an enthusiastic group of professionals that are dedicated to helping business owners (whether big, small or in the startup phase) understand their numbers, grow profits and provide a roadmap to success so they can achieve their goals faster.
Call us on 09 238 5939 for our Auckland office, 07 579 5011 for our Tauranga office, or free phone 0800 236 446 for a no obligation chat and see how Engine Room can help your small business grow.