Trial Balance

A trial balance is a report listing every account in the general ledger with its closing balance at a given date, shown in a debit column or a credit column. Its first purpose is a check: under double-entry accounting total debits must equal total credits, so a trial balance that does not balance shows that something has been recorded wrongly.

Its second purpose is practical. The trial balance is the starting point for preparing the financial statements and for the period-end adjustments made during the financial close. Auditors usually begin their work from the client's trial balance, mapping each account to a line on the balance sheet or income statement.

Imagine a shop owner who, at the end of each day, writes every amount twice: once for where money came from and once for where it went. Before going home, she adds up the two columns. If they match, she can be fairly confident nothing was half-written. If they differ by $50, she knows to search for a $50 slip recorded on only one side.

A trial balance is that end-of-day add-up for the whole business. It is not a report for outsiders; it is the bookkeeper's own check that the books are at least arithmetically sound.

The rule is:

Debit balances are normally assets and expenses; credit balances are normally liabilities, equity and revenue. A small company's trial balance at 31 December might read:

Both columns total $76,000, so the ledger balances. From these figures, revenue of $40,000 less expenses of $33,000 gives net income of $7,000, which will increase equity once the books are closed.

• Unadjusted trial balance. Run from the ledger before period-end adjustments; the starting point for the close.
• Adjusted trial balance. Run after adjusting journal entries for accruals, depreciation, prepaid expenses and similar items; the basis for the financial statements.
• Post-closing trial balance. Run after revenue and expense accounts have been closed to retained earnings at year end; it contains only balance sheet accounts, which carry forward into the new year.

Groups with several companies also prepare a consolidation trial balance, combining each entity's trial balance and removing balances between group companies after intercompany reconciliation.

When a manually kept trial balance does not balance, bookkeepers use a few traditional checks to narrow the search. First, they add up both columns again and confirm every ledger balance was carried across. Then they look at the size of the difference:

• Difference equal to one amount. An entry may have been posted on one side only.
• Difference equal to twice an amount. An entry may have been posted on the wrong side, for example $300 entered as a debit instead of a credit gives a $600 gap.
• Difference divisible by 9. Digits may have been transposed, such as $54 written as $45 (a gap of 9), or a figure written with a misplaced decimal point.

If none of these points to the error, each posting is traced from the journal to the ledger until the gap is found.

A balanced trial balance proves only that debits equal credits. Several kinds of error leave it balanced:

• Omission. A transaction never recorded at all.
• Commission. The right amount posted to the wrong account of the same type, such as one customer instead of another.
• Principle. An item posted to the wrong class of account, such as a repair recorded as equipment.
• Reversal. Debit and credit swapped between the two correct accounts.
• Compensating errors. Two separate mistakes that happen to cancel out.
• Original entry. A wrong amount recorded on both sides.

These are found through account reconciliation, bank reconciliation, review of balances against expectations and, for larger firms, audit by an independent auditor. In modern accounting software and ERP systems, the system rejects any entry that does not balance, so an out-of-balance trial balance is rare; the checking value of the report now lies mainly in reviewing the balances themselves.

• IFRS Foundation: IAS 1 Presentation of Financial Statements