Trial balance: What it is, how it works, and why it matters

Published Friday 7 November 2025

Table of contents

• What is a trial balance?
• Why trial balances matter for your business
• Types of trial balances
• How to prepare a trial balance
• Common trial balance errors
• Trial balance vs balance sheet
• The role of trial balances in financial statements
• Streamline your trial balance process
• FAQs on trial balances

Key takeaways

• Prepare trial balances at the end of each accounting period to verify that total debits equal total credits, catching mathematical errors before creating financial statements.

• Use the three types of trial balances strategically—unadjusted for initial data capture, adjusted after corrections, and post-closing to prepare for the next accounting period.

• Implement systematic error-checking by double-checking data entry, verifying source information, and using accounting software to prevent common mistakes like transcription errors and misclassifications.

• Recognize that trial balances serve as internal worksheets for accuracy verification, while balance sheets are formal financial statements for external stakeholders like lenders and investors.

What is a trial balance?

A trial balance is a financial report that lists all account balances from your general ledger at a specific point in time. It ensures your debits equal your credits, helping you catch errors before preparing financial statements. Most businesses use trial balances as the first step in closing their books at the end of an accounting period.

Think of it as a financial health check. The trial balance tests your books for fundamental errors before you prepare financial statements or undergo audits.

Components of a trial balance

The trial balance shows the closing balances of all accounts in the general ledger at a point in time.

A trial balance uses a simple three-column layout:

• Account names: List all ledger accounts from your chart of accounts (omit unused accounts)
• Debit balances: Record assets and expense accounts
• Credit balances: Record liabilities, capital, and income accounts

The debit and credit column totals must match.

Trial balance example

Here's an example of the trial balance format that shows the closing balances of all accounts in the general ledger at the end of a financial period.

The account names go in the far left column. All debit and credit balances from the general ledger are recorded in the 'Debit' and 'Credit' columns accordingly. The debit and credit columns total the same amount.

Why trial balances matter for your business

Trial balances help keep your business's financial statements accurate. You'll have more confidence that your numbers reflect your business's financial health. This helps you meet compliance requirements and make better-informed financial decisions.

Types of trial balances

Three types of trial balances help you at different stages of your accounting process:

• Unadjusted trial balance: Your starting point that captures initial data and reveals obvious errors
• Adjusted trial balance: Includes corrections and adjustments needed for accurate financial statements
• Post-closing trial balance: Ensures your ledger is ready for the next accounting period

Each type uses the same format but serves a specific purpose in your month-end or year-end process.

Unadjusted trial balance

An unadjusted trial balance captures all initial data from your general ledger. It records day-to-day transactions that can then be adjusted to balance the ledger.

You or your accountant takes this unadjusted trial balance and makes any needed adjustments. These may include accruals, such as adding unpaid bills, deferrals, like recognizing income only when it’s earned, and depreciation, which spreads the cost of an asset over several years. Adjusting these figures gives you a better view of your business's financial position.

Adjusted trial balance

After preparing your adjusted entries, you (or your accountant) can complete an adjusted trial balance.

You prepare an adjusted trial balance after the unadjusted trial balance but before any other financial statements. The adjusted trial balance is a summary of the final balances in all accounts, which you then use to help prepare your financial reports.

Post-closing trial balance

You prepare your post-closing trial balance after you finalize all your financial statements and close any temporary accounts, such as revenue, expenses, and dividends accounts. The balances of these temporary accounts move into your business's retained earnings as part of the closing process.

You then prepare your post-closing trial balance to verify that all debit and credit balances are equal. This step also prepares your general ledger for the next accounting period. By doing this, you ensure a clear separation between old and new accounting periods.

How to prepare a trial balance

Preparing a trial balance is a straightforward way to check your books for mathematical accuracy. It's a key step before creating formal financial statements. Follow these steps to create one:

1. List all your general ledger accounts and their final balances for the period.
2. Place all accounts with a debit balance (like assets and expenses) in the debit column.
3. Place all accounts with a credit balance (like liabilities, equity, and revenue) in the credit column.
4. Add up all the numbers in the debit column to get a total.
5. Add up all the numbers in the credit column to get a total.
6. Compare the two totals. If they match, your ledger is balanced. If not, it's time to review your entries to find the error.

Common trial balance errors

Small trial balance errors can create big financial problems by distorting your financial statements and leading to poor business decisions.

Watch out for these common mistakes:

• Transcription errors: Data entry mistakes like typing $5,000 instead of $500
• Omission errors: Leaving transactions out of your accounts entirely
• Misclassification errors: Recording transactions under wrong account categories

How to correct trial balance errors

Simple mistakes are easy to fix with these three steps:

• Double-check your work: Review numbers thoroughly, take a break, then check again with fresh eyes
• Verify source data: Confirm ledger figures are correct before entering them into your trial balance
• Use accounting software: Tools like Xero prevent data entry errors and automate calculations, giving you more time for accuracy checks

Trial balance vs balance sheet

While both reports show your financial information, they have different purposes and are used at different points in your accounting process.

A trial balance is an internal bookkeeping worksheet. Its main job is to check that the total debits in your general ledger equal the total credits. This is a preliminary step to make sure your numbers are correct before you create official reports.

A balance sheet is one of the main formal financial statements. It presents your business's financial position to external parties, such as lenders or investors. It summarizes your assets, liabilities, and equity. The balance sheet shows what your business owns and owes at a specific point in time.

The role of trial balances in financial statements

Trial balances serve as the foundation for your financial statements and audit processes.

The primary purpose is to verify that your general ledger account balances accurately reflect your business's financial position.

How it works:

• Your accountant checks that debit and credit totals match
• If totals don't match, they identify missing entries or copying errors
• After corrections, the adjusted trial balance becomes the basis for financial statements

Accountants rely on trial balances to prepare balance sheets, while auditors use them to verify your financial records.

Even if the totals match, there could still be mistakes in the accounting system, such as missing transactions or incorrect classifications.

According to the Public Company Accounting Oversight Board, inappropriate journal entries often have unique identifying characteristics. These may include entries made to unusual accounts, those with little description, or those containing round numbers. You can find more information on FASB accounting standards.

Streamline your trial balance process

Keeping your trial balance accurate helps you make smarter business decisions and simplifies year-end reporting. With tools that automate bookkeeping, you can spend less time on manual checks and more time growing your business. You can easily run financial reports and manage your finances with confidence using Xero. Get one month free to see how it works.

FAQs on trial balances

Here are common questions small business owners might have about trial balances.

What are the three rules of trial balances?

There are three fundamental rules that ensure trial balances are correct:

1. Total debits must equal total credits
2. Use the right chart of accounts
3. Ensure you enter your data properly

What is the objective of the trial balance?

A trial balance in accounting helps uncover any mathematical errors in your bookkeeping practices. If the total debits equal your total credits, your trial balance is properly balanced – which indicates your ledgers probably don't contain errors.

But if there's a difference in the totals, there could be mistakes to fix. Trial balances are also a useful foundation when preparing your financial statements.

What is the trial balance formula?

There isn't a single formula for a trial balance. Instead, it follows a fundamental accounting principle: total debits = total credits. The process involves summing up all debit balances from the general ledger and ensuring they equal the sum of all credit balances.

When should small businesses prepare trial balances?

You can prepare a trial balance at any time, but it's most commonly done at the end of an accounting period, such as a month, quarter, or year. You do this before creating the main financial statements to ensure the books are accurate. You can use accounting software to generate a trial balance whenever you need a quick check of your accounts.