Trial Balance
What is a Trial Balance?
A trial balance is like a financial checkpoint for an entity’s accounting system. It’s a report that summarises all the credits and debits recorded in the entity’s accounts during a certain period, usually a month or a quarter. The main purpose of a trial balance is to make sure that the total amount of money recorded as credits in all accounts equals the total amount recorded as debits.
In double entry accounting, every transaction involves at least two accounts: one gets credited and the other gets debited. The trial balance helps ensure that for every credit entry, there’s a corresponding debit entry, and vice versa.
By adding up all the credit balances and all the debit balances across different accounts, the trial balance provides a quick way to check if the accounting records are accurate and balanced.
Although nowadays many accounting systems automatically check for balanced credits and debits, trial balances still serve an important purpose. They’re handy for accountants who want to review their work and make sure everything adds up correctly.
Plus, they’re useful for auditors who need to understand which accounts to scrutinise during an audit to ensure the financial statements are accurate.
What does a Trial Balance include?
A trial balance document includes a list of all the accounts from the general ledger, which is the main record of financial transactions. The trial balance has two columns: one for debits and one for credits. Here’s what is included in a trial balance:
Credits and debits to each account
This section details all the transactions that occurred within the specified timeframe. It shows whether money was added (credited) or subtracted (debited) from each account.
The account names
Each account mentioned in the trial balance is labelled with its name, helping to identify the type of transaction it represents. For instance, accounts might include Cash, Accounts Receivable, Inventory, and so on.
The account numbers
Alongside the account names, there are usually corresponding numbers. These account numbers provide a standardised way to reference and organise the accounts, making it easier to locate specific information.
The dates of the accounting period
The trial balance specifies the timeframe for which the financial data is being analysed. It could be a month, a quarter, or a year, depending on the entity’s accounting practices.
The total sum of all debit balances and credit balances
At the bottom of the trial balance, the total debit balance and total credit balance are calculated. The aim is to ensure that these two totals match, indicating that the entity’s accounting records are balanced.
Limitations of a Trial Balance
A trial balance, while a helpful tool, does come with certain limitations. It primarily focuses on ensuring that debits and credits balance out within an entity’s financial records. However, there are several types of errors that it cannot detect.
Errors Beyond Debits and Credits
A trial balance is designed to spot discrepancies between debits and credits. Yet, it doesn’t catch instances where a transaction is mistakenly recorded twice, or when a transaction is entirely missed in the records.
Errors of Judgement or Estimation
Sometimes, errors aren’t about the actual recording of transactions but rather the assessment of values. A trial balance doesn’t pick up on instances where assets are overvalued or liabilities are undervalued.
Errors Uncovered Differently
Apart from the limitations of a trial balance, there are various types of errors that require different methods for identification and rectification.
- Omissions, Commissions, and Principle Errors: These types of mistakes, involving either missing transactions, transactions recorded in the wrong accounts, or transactions not aligned with accounting principles, aren’t flagged by the trial balance. Detecting and correcting them requires a more detailed examination of financial statements.
- Errors of Judgement or Estimation: Inaccuracies in estimating the values of assets or liabilities can significantly impact financial statements but aren’t caught by the trial balance.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
