There are two very good reasons for taking out a trial balance statement:
- It is one of the steps towards preparing the profit and loss account and the balance sheet,
- It is proof that, subject to certain exceptions described shortly, the books are in good order. It is good practice to take out a trial balance regularly, perhaps once a month,and it is virtually essential to do so when the accounts are prepared. This means that if a mistake has to be found, only a month’s entries need be checked.
Please note particularly the phrase ‘take out the trial balance’.
What is Trial Balance
The trial balance is not an account and it does not involve posting then it is a report. It is the listing of all the balances in the ledger. You will remember that for every debit there must be a credit. It follows that the total of all the debit balances must equal the total of all the credit balances. If they do not do so, then a mistake has been made.
Trial Balance Format
There are limitations to the proofs provided by a trial balance. It may balance and yet the following three types of error will not be disclosed.
- A compensating error: This is two mistakes of the same amount, one increasing or decreasing the debits and one increasing or decreasing the credits.
- An error of principle: This means the right amount posted to the wrong account.
- A transaction omitted altogether.
The first two types of these errors may never be discovered. The third type mayor may not eventually be discovered, depending on the nature of the transaction that has not been posted. A supplier demanding payment of an unrecorded invoice may, for example, lead to its discovery. All three types of error are nasty and mean that two accounts in the bookkeeping system are wrong.
A difference on the trial balance will disclose one of the following mistakes:
- A mistake in listing or adding the trial balance
- A wrong addition on an account
- A mistake in writing out the brought forward balances
- One side of an entry not posted (double entry not complete)
- Posting of wrong amount
- A missing ledger sheet
Adjusting Trial Balance
You might find the cause of a trial balance difference by means of a random search. However, it is much better to conduct the search in a systematic manner. You must locate the cause of the difference if you do the following in a systematic way:
- Check the listing of the balances within the trial balance.
- Check the addition of the trial balance.
- Check the listing of the opening balances.
- These are either the balances brought down or the balances at the time that the last trial balance was agreed.
- Check the addition of each individual account within the trial balance. Check from the brought forward balances or the balances making up the last trial balance.
- Tick each individual posting during the period under review. Every debit should have a matching credit and there should be no un-ticked entries at the end.
If done properly, this must find the difference. If, which is of course likely, you have a computerized bookkeeping system, all of this may sound archaic. This is because the system will automatically ensure that the books balance and, in effect, maintain an up-to-date trial balance from day to day. Nevertheless, it is vital if manual records are kept and, in any case, it is as well to know the theory, especially the types of errors that will not be disclosed by a trial balance. As mentioned in the last chapter, some computer systems may accept unbalanced input and put the difference to a suspense account. If this happens, you have a balanced trial balance and also a problem, or at least a job to do.
Trial Balance Example
As you see in this example, always total of debit column should be equal to credit column
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