After analyzing transactions, recording them in the journal, and posting into the ledger, we enter the fourth step in the accounting process – preparing a trial balance.
A trial balance simply shows a list of the ledger accounts and their balances. Its purpose is to test the equality between total debits and total credits.
It shows a summary of how much Cash, Accounts Receivable, Supplies, etc. the company has after the posting process.
The account names are listed as arranged in the ledger and the balances are placed either on the debit or credit column.
Trial Balance Example
To illustrate, here's a trial balance example. Based on the ledger we prepared in the previous lesson, the trial balance would look like this:
|Gray Electronic Repair Services|
|Unadjusted Trial Balance|
|December 31, 2016|
|Furniture and Fixtures||3,000.00|
|Accounts Payable||$ 9,000.00|
|Mr. Gray, Capital||13,200.00|
|Mr. Gray, Drawing||7,000.00|
|Taxes and Licenses||370.00|
|Totals||$ 43,750.00||$ 43,750.00|
The purpose of the trial balance is to test the equality between total debits and total credits after the posting process. This trial balance is called an unadjusted trial balance (since adjustments are not yet included).
There are two other types of trial balance: the adjusted trial balance which is prepared after adjusting entries are prepared and posted, and the post-closing trial balance which is prepared after closing entries. These two are prepared in later steps of the accounting process.
Equal Doesn't Always Mean Correct
When the total debits and total credits are not equal, it is a clear indication that a mistake has been committed in the journalizing and/or posting process. An amount must have been entered incorrectly; hence, must be corrected.
However, the trial balance does not guarantee that the records are accurate even if the total debits and total credits are equal. There are instances when this happens such as:
- when a transaction was not recorded or not posted (no debit and no credit),
- when a transaction was recorded or posted twice (total debits and total credits are both overstated by the same amount),
- when an account was recorded instead of another account of the same classification; for example, Supplies was debited instead of Equipment (the total debits would still be correct since they are both asset accounts).