In the world of accounting, a trial balance is very important to ensure compatibility between credit accounts and debit accounts.
Basically, this balance sheet is not a financial report, but the information needed to prepare the three main financial statements.
Among the balance sheet reports, income statements, and cash flow statements.
So, what exactly is a trial balance? Check out the meaning, purpose, types, and how to arrange them in the following article!
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What is Trial Balance?
The trial balance is information that contains a summary of the ending balances of all general ledger accounts .
Generally, these balances are prepared with the intention of verifying the arithmetic accuracy of the ledger postings.
In a trial balance or trial balance, all ledger balances are listed on either the debit or credit side of the report.
The sum of the debit balances on the trial balance must be equal to the sum of the credit balances, only then is it said to be arithmetically accurate.
Trial balance is the main source for preparing various financial reports such as cash flow, loss and profit, and balance sheets.
In layman’s terms, you can assume that the trial balance is the basic structure behind the preparation of the final accounts of the three major financial statements.
It is the third step in the financial accounting roadmap to prepare final accounts after journal entries followed by classification and grouping of transactions to ledgers.
This ledger is the main book that contains all sets of accounts which will later be accumulated in one place to form a trial balance.
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Purpose of Trial Balance
As explained above that a trial balance is a statement prepared to ensure that journal and ledger postings are done correctly.
That way, the ending balance can be considered for preparing final accounts and other financial statements.
Trial balance functions to ensure compatibility between debits and credits before preparing other financial statements.
The following are some of the important goals of a trial balance:
1. To Ensure the Arithmetic Accuracy of Ledger Accounts
As a summary of all general ledger account closing balances, a trial balance can help you ensure accuracy between journals and ledgers in online bookkeeping applications .
A trial balance can be said to be accurate only if the total debit balance equals the total credit balance.
2. Helps Minimize the Occurrence of Errors
With a trial balance, you can find out if there is a difference between the credit side and the debit side.
If there is a difference, then it indicates that the journal or ledger is not done efficiently.
This clearly implies that there is an error and you can find and fix it as soon as possible.
Errors may occur at any stage of accounting, such as posting errors in journal entries to general ledger accounts, calculation errors, or something else.
3. Assist in preparing financial reports
Trial balance is like a bridge between accounting records and financial reports.
Trial balance will make it easier for you to prepare all major financial reports in financial reporting software .
This balance sheet contains a list of all accounts used by the company with balances in the debit and credit columns.
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Trial Balance Types
There are three types of trial balances, namely the trial balance before adjustments, the trial balance after adjustments, and the trial balance after closing.
For more details, try to understand the following description:
1. Trial Balance Before Adjustment
A pre-adjusting trial balance is usually prepared before adjusting journal entries are finalized.
Generally, this balance sheet reflects all activities recorded from day-to-day transactions and serves to analyze accounts when preparing adjusting entries.
For example, if you know that the remaining balance in prepaid insurance should be Rp. 9,000,000, then you can check this balance sheet to confirm that.
2. Adjusted Trial Balance
The next type of trial balance is the trial balance after adjustment. This balance is completed after adjusting entries are made.
The adjusted trial balance has the final balance in all accounts and is used to prepare financial statements.
3. Post Closing Trial Balance (After Posting Trial Balance)
Finally, there is an after posting trial balance, which shows the balance after the closing journal has been completed.
This is your initial trial balance for the next accounting year or period.
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Trial Balance Preparation Method
Broadly speaking, there are two methods used in preparing a trial balance. Among them are:
1. Balance Method
In this method, the balance is the net amount of the general ledger shown in the trial balance. It can be a debit or credit balance.
Using the balance method, a trial balance can be prepared only after all accounts are balanced.
This is one of the accurate methods for final account preparation.
2. Total Method
You can also use the total method to prepare a trial balance. In this method, the total for each side of the account (debit and credit) will be posted on the trial balance.
This method provides higher mathematical accuracy.
However, preparing final accounts using this method is relatively difficult due to the scope of duplication which can lead to errors.
Trial Balance Preparation Steps
For further discussion, let’s understand how to prepare or arrange a trial balance. Here are the steps:
1. Calculate the Balance of Each Ledger Account
Business transactions are first recorded in the form of journal entries following the basic principles of accounting.
These journal entries then go into the general ledger accounts involved in various business transactions.
For example, a retail company has cash transactions recorded and the cash account is closed with a remaining debit balance of Rp. 10,000,000 on May 1, 2018.
Therefore, make sure the balance of the other ledger account equals the remaining debit or credit balance.
2. Record Debit or Credit Balances in the Trial Balance
The next step, record the remaining debit or credit balances in the various general ledger accounts as ascertained above and then record them in the trial balance.
The balance of each ledger account is recorded in the debit or credit column according to the circumstances.
For example, the remaining debit cash balance on May 1 2018 is recorded in the debit trial balance column, as well as the credit balance.
Likewise, the remaining debit or credit balances of all general ledger accounts are recorded in the debit or credit columns of the trial balance, respectively.
3. Calculate Total Debit Column
The next step is to calculate and record all debit balances from various general ledger accounts that are entered into the debit column in the trial balance.
For example, you first calculate all closing debit balances from various general ledger accounts. These accounts include cash or cash, stock, furniture, and others.
Then, record the total and enter it into the debit column in the trial balance.
5. Calculate the Total Credit Column
Just as you calculated the totals for the debit column, do the same for the credit columns of your trial balance.
Make sure the column totals match the total closing credit balance columns in the ledger.
Included in credit accounts are capital or asset accounts, interest accounts, receivable accounts, and so on.
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5. Check if the total debit balance equals the credit balance
Finally, you need to check if the debit column totals match the credit column totals.
As you know in the previous discussion that a trial balance is prepared to check the accuracy of the debit and credit balances of various general ledger accounts.
Therefore, the debit and credit columns of the trial balance must match.
If a mismatch occurs, it is an indication that some mistake was made while recording the transaction in the general ledger.
Ensure that the entire recording process follows accounting principles, namely that all assets, expenses and receivables must have a debit balance.
Likewise, all liabilities, income and payables must have a credit balance.
Well, that’s the discussion regarding the trial balance that you need to know. Hopefully this article can help you in the process of preparing financial reports more precisely and carefully.