Introduction to bookkeeping and accounting: 2 6 Balancing off accounts and preparing a trial balance Open University

A trial balance can be used to assess the financial position of a company between full annual audits. Each month, you prepare a
trial balance showing your company’s position. After preparing your
trial balance this month, you discover that it does not balance.

• Furthermore, a trial balance forms the basis for the preparation of the main financial statements, the balance sheet and the profit and loss account.
• So, you can’t rely on a trial balance to reveal every issue in your business accounts.
• We need to work out the balance on each of these accounts in order to compile the trial balance.
• Companies initially record their business transactions in bookkeeping accounts within the general ledger.
• The
  debit and credit columns both total $34,000, which means they are
  equal and in balance.

The debit column shows $2,000 more dollars than the credit column. Once all balances are transferred to the unadjusted trial
balance, we will sum each of the debit and credit columns. The
debit and credit columns both total $34,000, which means they are
equal and in balance. However, just because the column totals are
equal and in balance, we are still not guaranteed that a mistake is
not present. Again, prepare trial balances when closing your books for a period (e.g., a month). Typically, the trial balance is the first step of the closing process.

How a Trial Balance Works

Business owners prepare a trial balance more than once during the accounting cycle. In fact, you need to use three trial balances when closing your books—one for three different Preparing A Trial Balance For Your Business stages in the cycle. An accounting trial balance is for businesses that use accrual accounting. In accrual accounting, your debits and credits must equal one another.

Finding discrepancies like this is why you created a trial balance, and discovering the error now can save you time and headaches later on. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them. If you’re entering accounting transactions manually or using spreadsheet software, running a trial balance is a must. If you’re using accounting software, you can still run a trial balance at the end of the accounting period to ensure that your ending balances look right. After the above entries have been posted to the appropriate general ledger accounts, you are now ready to run an adjusted trial balance, which will reflect the updated balances.

Balance Method

Depending on your accounting system, you may need to combine multiple expenses and sources of income. For example, your accounts payable account may contain multiple smaller https://kelleysbookkeeping.com/how-to-calculate-accrued-payroll/ entries, which you’ll need to total before transferring this data to your trial balance. You should try to create a trial balance at least once every reporting period.

You should prepare trial balance reports at the end of each reporting period. That way, your books are accurate and updated (which could save you from audits and penalties). The equality of the two totals in the trial balance does not necessarily mean that the accounting process has been error-free.

What is a trial balance used for?

The first step in balancing your accounts is called an unadjusted trial balance sheet, as it will be your initial review before any corrections are made. If the difference is divisible by 9, you may have made a transposition error in transferring a balance to the trial balance or a slide error. A transposition error occurs when two digits are reversed in an amount (e.g. writing 753 as 573 or 110 as 101).

• For example, let’s
  assume the following is the trial balance for Printing Plus.
• So the cost of the computer ($1000) will go into the credit balance as a purchase (- $1000) and then into the debit balance too because it is a new asset for your company (+ $1000).
• The debit side and credit side of ledger accounts are added up.