A Trial Balance is created by a company because we want to summarize all the business activities that we have recorded throughout the months in the form of journal entries. These journal entries will result in a balance for each account in the general ledger.
The Trial Balance consists of all of the active accounts in the Principal Book of Accounting System (GL) of the company. So, for most companies, this would include cash accounts, receivables, inventory, payables, all the equity accounts, and then income and cost accounts.
With the help of the Trial Balance, we are able to make sure that the entries that we have recorded in the journals throughout the period are equal or net out to zero, so the debits are equal to the credits. If any errors are detected, it is not complicated to correct them at this stage. Although this report is not required, besides checking for the mathematical accuracy of the company’s general ledger, we also prepare easily available data for key financial statements that will be compiled next.
Let’s look at an example of a Trial Balance for XAO Corporation.
As you can see from this sample balance, the company has listed all the active Balance sheet accounts first, followed by revenue and expense accounts. When we are looking at the balance of each of these general ledger accounts, you will see that they also have either debit or credit balance.
An easy way to remember which account has which balance is to use a mnemonic DEALER. It stands for Dividend, Expenses, Assets, Liabilities, Equity, and Revenue. The first three will have a debit nature, while the last ones will have a credit nature.
In our example, we can see that the company’s Trial Balance reflects that the sum of all debits zeroes out the sum of all credits. This is a good start. It does not mean that this Trial Balance completely correct because it could have recorded the same entry twice and still net out to zero. The bookkeeper could also have reversed a journal entry or recorded it in a flip way, so it is wrong but the totals are still equal. Thus, you still need to check the bookkeeping records to make sure that everything is recorded in the right way, which is the purpose of an audit.
Trial Balance in Practice
Now, let’s practice creating a Trial Balance from the T-accounts of the Landish company shown below.
As with any financial report, we first need to add a title at the top. Then, we can move on to entering the data into our report. As you might recall, we will first list our Balance sheet accounts in the order they appear on this financial report, followed by income and expense accounts.
After doing some math, we can find the final amount in the Cash account, which is equal to $16,455. Next, we will enter the totals for all the other accounts, keeping in mind to double-check our math when calculating the totals. We should also make sure to enter the amounts in the right column, which is easy when you have T-accounts where you can clearly see the final balance of all the accounts. In other cases, you can use the mnemonic mentioned above.
December 31, 20XX
Once we have added all the accounts to our Trial Balance, we can sum up each column. In our case, we can see that they are equal, which is good news.