What Is A Trial Balance? (With Steps To Prepare And Tips)

By Indeed Editorial Team

Published 4 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A trial balance is an accounting report that denotes the balances of a company's ledgers. It reflects the assets, liabilities, equities, revenues, expenses, gains, losses and other major accounting items that are necessary to prepare the financial statements of an organisation or individual. If you learn about trial balance, you can identify the debit and credit transactions of a company during an accounting period and ensure the mathematical accuracy of its bookkeeping system.

In this article, we discuss the answer to 'What is a trial balance?', some related rules, steps for preparing a trial balance, review common errors and a trial balance sample.

What is a trial balance?

If you are wondering 'What is a trial balance?', the answer is quite simple in accounting terms. It is a bookkeeping worksheet compiled for internal use where you list all the general ledger accounts along with their closing balances. While computing the trial balance, you input the balances of these ledgers into debit or credit account lists in separate columns. It is necessary that the total amount in each column is equal. To ensure that bookkeeping entries are continuously correct and balanced, businesses typically perform trial balances at the end of each accounting period.

Computing a trial balance has two main purposes:

  • It summarises all the company's ledgers. It saves time, as you can consult the net balance displayed on the trial balance instead of viewing a particular ledger again.

  • It ensures that there are no errors in the accounting system entries. If the debit and credit columns are equal, it indicates that the entries in the company's ledgers are accurate.

Related: Basics Of Accounting - Terminology, Principles And Concepts

Important rules for preparing a trial balance

While computing a trial balance, make sure you adhere to these rules to avoid any errors:

  • Enter all liabilities in the credit column and all assets in the debit column.

  • Gains and revenue appear on the credit side.

  • Losses and expenses go on the debit side.

  • Consider all the nominal, personal and real accounts while preparing the trial balance.

  • Avoid any ledger that shows zero balance.

  • Enlist the opening stock figure in the profit and loss account.

  • Show the sales and purchase returns either as reductions from the main purchase and sales ledger or as separate line items in the trial balance.

  • Ensure that the debit and credit balances are identical at the end.

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How to prepare a trial balance?

You can prepare trial balances either manually or by using an accounting system on a computer. While preparing a trial balance for any business, take the following steps:

1. Balance each ledger account

Businesses record their transactions as journal entries at first, and then make the entries in the respective ledger accounts. Then, they calculate the closing balances of each ledger account during the accounting period. Common ledger accounts include inventory, utilities, loans, rent and wages. The closing balances of the ledger accounts go into the trial balance sheet. To ensure there are no errors, determine the closing balances of all accounts you have on your ledger before preparing a trial balance. The balance is the difference between the total credits and the total debits of an account.

2. Prepare the trial balance worksheet

The next step is to prepare the trial balance worksheet by creating three separate columns. One column contains the names of each ledger account and the other two columns contain the debit and credit balances of each account. Adding account numbers and other details is optional.

3. Fill out the worksheet

Fill in the names of each account and each ledger account's total debits or credits for the accounting period. Make sure you enter the amounts in the appropriate column. Input the debit transactions in the debit column and credit transactions in the credit column.

4. Add the values in each column

After filling out each column, you can add up the values in each column to find the total of the columns. If your company's ledgers are correct, the totals of the credit and debit columns are going to be equal. This is when you can identify if there are any errors in the entries.

5. Close the trial balance

You can close the trial balance worksheet if your credit and debit columns are equal. If they are not equal to one another, it is necessary to find the error in your ledger. If you are aware of the common errors that can cause unequal credit and debit columns, it can become easier to locate and rectify them. You can only close the account after rectifying all errors.

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Common errors that may cause a trial balance mismatch

If one side of the trial balance does not tally with the other, it may be because of a one-sided entry error. Some such errors are as follows:

  • Duplicate entries: This error happens if you make an entry twice.

  • Reversed entries: If you enter a debit entry as credit by mistake, it changes the trial balance.

  • One-sided entries: This happens when you enter only one side of the transaction.

  • Error in previous trial balancing: If there is any mistake while entering the previous accounting period's closing balance in the current one, this type of error occurs.

  • Balancing accuracy errors: This happens when you enter the wrong value into the trial sheet. For instance, you enter a credit balance of ₹90,000 as ₹9,000 in the trial balance.

  • Account mismatch: If you make an entry into the wrong account, or debit or credit a wrong account, this error occurs.

  • Transposed numbers: This error might happen if the digits in a number get switched. For example, you enter ₹65,978 as ₹56,978.

  • Ledger-related errors: These errors include a wrong amount posted in the ledger, an entry made in the wrong column and a mistake made when transferring the ledger balances to the trial balance columns.

Tips to identify errors in the trial balance

Follow these tips to locate any of these errors and correct them:

  • Check for any calculation errors by adding up the totals of debit and credit columns of the trial balance.

  • Check if you have added the transaction from the ledger to the correct account head in the trial balance.

  • Check for partial and complete omissions of a transaction.

  • Go through each ledger account balance one by one and balance them once more.

  • Examine the posting from subsidiary books or journal entries to the ledger.

  • Check the additions of the subsidiary books and ledger accounts.

  • Compare with the previous year's trial balance to check for any major additions and deletions of accounts.

  • Divide the difference between the debit and credit balances by two and scan for that amount on the side with the higher amount.

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Which errors do not reflect on a trial balance?

A trial balance can only vouch for the mathematical accuracy of general ledgers. It cannot detect other types of errors in the accounting system. These are double-sided entry errors that apparently do not affect the trial balance, as the amounts on both sides can be equal. Despite so, the trial balance can be wrong. Some such undetectable errors are:

  • Error of original entry: This error happens if you enter the wrong amount on both sides during the double-entry transaction. This is an issue of oversight.

  • Error of principle: This error can happen if you violate the fundamental accounting principles while entering a transaction, owing to the lack of knowledge of accounting principles or attention. A common example is recording a payable transaction as a receivable transaction, or vice versa.

  • Error of omission: If you do not enter a transaction into the system altogether, an omission error occurs. This is a clerical error that is undetectable on the trial sheet, as it is a mistake in the journal entry.

  • Error of commission: Commission errors occur when you enter the right amount into the right account but into the wrong ledger, so that the amount to subtract gets added or vice versa. This is a consequence of a lack of arithmetical accuracy.

  • Error of reversal: This error happens due to oversight, when one enters a debit transaction as credit, or vice versa.

  • Error of compensation: If you make two simultaneous mistakes where one mistake cancels out the other, a compensation error occurs. The debit and credit accounts are still equal, but both amounts are wrong due to this error.

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Example of a trial balance

Here is a trial balance sample for a given accounting period:

Account

Debit

Credit

Insurance payment₹3,00,000
Vendor payable
₹2,00,000Cash₹3,00,000
Office equipment₹2,00,000
Bank loan
₹10,00,000Salaries₹7,00,000
Accounts payable
₹3,00,000Total₹15,00,000₹15,00,000

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