How do you turn transactions you make in your books into financial statements? Once you summarize your journal entries at the end of the period in your general ledger, it’s time to run a trial balance report.
What is a Trial Balance?
A trial balance report that displays the total debits and credits in all your general ledger accounts. Debits are shown in the left column and credits on the right. Once the columns are totaled, credits and debits should be equal. If they aren’t equal, you’ll know an error has been made.
While a trial balance is a good way to check accuracy in your accounting, it won’t catch all possible errors in your books. That’s what it’s also important to reconcile your accounts throughout the year to ensure your statements and receipts match what’s in your books.
What is the Purpose of a Trial Balance?
Since a trial balance displays all your general ledger accounts and the corresponding debits and credits, you can easily find all your important financial information in one place. This is why it’s commonly used to create the three major financial statements — the balance sheet, income/P&L statement, and the cash flow statement.
You can use the information from the asset, liability, and equity accounts on the report to create the balance sheet. The revenue and expense accounts provide the information you need for the income statement. Details from accounts that interact with the cash accounts can be used to prepare the cash flow statement.
As mentioned previously, the trial balance is also helpful in detecting mistakes in your bookkeeping. If the debits and credits are unequal, it’s time to do some investigating.
Common Reasons for Unbalanced Debits and Credits
Here are some common reasons for unbalanced debit and credit accounts:
Made a mistake inputting information
Posted a transaction in the wrong account
Posted debits and credits in the wrong column
Meanwhile, here are some errors that won’t be detected on the trial balance report:
Switching the debits and the credits
Omitting a transaction
Unadjusted vs. Adjusted Trial Balance
There are two types of trial balance reports — unadjusted and adjusted. Just like it sounds, an unadjusted trial balance is what you initially get before making any adjusting entries. This is the first step in creating a trial balance.
You may find you need to adjust something for taxes, or that debits and credits don’t balance, or that you’ve missed a transaction. Here are the four main types of adjustments you may need to make to your trial balance:
Deferral: Get rid of any transactions that don’t belong to the current period you’re creating a trial balance for.
Accruals: If you use accrual accounting, you want to consider future payments and expenses.
Missing transactions: While reconciling your accounts, you may come across a transaction you forgot to record.
Tax adjustment: Determine which tax deductions you need to make during that period.
After all these adjustments have been made, you get the adjusted trial balance.
If you use accounting software, typically there won’t be an unadjusted and adjusted report, just a trial balance. Adjustments can be made in software in real-time so that they’re always up to date.
Trial Balance Example
Here’s a very simple example of a trial balance report. As you can see, debits are on the left while credits are on the right. General ledger accounts are listed with their corresponding debits and credits and all the accounts are totaled up to see total debits and credits. Once totaled, debits and credits should be equal.
Need help with your bookkeeping?
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