Trial Balance Explained: Purpose, Types & How It Works

Published Friday 5 December 2025

Table of contents

• What is a trial balance?
• What is the purpose of a trial balance?
• How does a trial balance work?
• The role of trial balances in financial statements
• Types of trial balances
• Trial balance rules and requirements
• Common trial balance errors
• The importance of trial balances for small businesses
• FAQs on trial balances

Key takeaways

• Prepare trial balances at three key stages of your accounting cycle: create an unadjusted trial balance first to gather initial data, then an adjusted trial balance after corrections, and finally a post-closing trial balance to prepare for the next accounting period.

• Verify that total debits equal total credits in your trial balance to catch mathematical errors before preparing financial statements, as this fundamental check ensures your books are mathematically accurate and ready for audit or tax reporting.

• Use trial balances as the foundation for creating essential financial statements like balance sheets and income statements, since an accurate trial balance provides the verified account balances needed for these critical business reports.

• Implement accounting software like Xero to automate trial balance preparation and reduce manual errors, as this technology streamlines the process and provides real-time financial insights while maintaining accuracy.

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 helps you verify that your books are mathematically accurate before preparing financial statements — a principle so fundamental that topics like the accounting system and double entry make up 35% of the CPA's Foundations of Accounting exam. Many businesses create a trial balance as the first step in closing their books at the end of an accounting period.

This “trial” tests your books for fundamental errors before you prepare financial statements or undergo audits.

Components of a trial balance

The trial balance has a simple three-column layout:

• One column for the names of all the ledger accounts from your chart of accounts, on the left side of the report
• One column for debit balances
• A third column for credit balances

Here’s what goes in each column:

• Account names: List all active accounts from your chart of accounts
• Debit balances: Enter assets and expense accounts
• Credit balances: Enter liabilities, equity, and income accounts

The totals of the debit and credit columns should 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.

What is the purpose of a trial balance?

A trial balance serves a few key purposes in your accounting cycle. It’s more than just a list of numbers; it’s a vital health check for your books.

• Check for mathematical errors: Its primary job is to confirm that the total debits in your general ledger equal the total credits. If the totals don’t match, it flags that there’s a calculation error somewhere that needs to be found and fixed.
• Provide a summary: It gives you a complete list of every account and its balance in one place. This makes it a useful internal document for reviewing financial activity over a period.
• Prepare financial statements: An accurate trial balance is the starting point for creating essential reports like the balance sheet and income statement.

How does a trial balance work?

A trial balance works by testing the golden rule of double-entry bookkeeping: for every transaction, total debits must equal total credits.

The report lists every account from your general ledger and places its final balance in either a ‘debit’ or ‘credit’ column. When you add up all the balances in both columns, the two totals should be identical. If they match, your books are considered ‘in balance’.

The role of trial balances in financial statements

Trial balances serve two key purposes: They help accountants prepare balance sheets and other financial statements and provide auditors with verification that your books balance correctly.

Your bookkeeper or accountant uses trial balances to verify that account balances accurately reflect your business’s financial position, which is critical as these financial accounting figures form the basis of official documents like New Zealand’s Financial Statements Summary (IR10) tax return.

Your advisor checks that the debit and credit column totals of your business’s general ledger accounts match; if they don’t, a missing debit or credit entry, or an error in copying over from the general ledger account may be the cause.

Once your bookkeeper or accountant has corrected any mistakes, they can produce the adjusted trial balance, which can then be used to help prepare other financial statements.

There could still be mistakes or errors in the accounting system even if the amounts do match, such as missing transactions or incorrect account classifications.

• A trial balance lists all your general ledger accounts and checks that total debits equal total credits, so your books are in balance
• You use unadjusted, adjusted and post-closing trial balances at different stages of your accounting cycle
• Trial balances help you spot errors early and form the basis for accurate financial statements and tax reporting
• Accounting software like Xero can automate trial balances, reduce manual errors and give you up to date financial insights

Types of trial balances

Three types of trial balances serve different stages of your accounting process:

• Unadjusted trial balance: Created first to gather initial data and spot obvious errors
• Adjusted trial balance: Prepared after corrections to create accurate financial statements
• Post-closing trial balance: Completed last to prepare your ledger for the next accounting period

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 makes adjustments to the unadjusted trial balance. Common adjustments include:

• accruals: adding unpaid bills or earned but unbilled income, a key part of accrual accounting, which constitutes 10% of the CPA's foundational exam curriculum.
• Deferrals: Recognizing income only when earned
• Depreciation: Spreading asset costs over multiple years, although for tax purposes in New Zealand, this excludes buildings with an estimated useful life of 50 years or more.

These adjustments provide a more accurate 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 only prepare your post-closing trial balance after you’ve finalised all your financial statements and closed any temporary accounts (like 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 do your post-closing trial balance to verify that all debit and credit balances are equal, and to prepare your general ledger for the next accounting period. By doing this, you’re ensuring a clear separation between old and new accounting periods.

Trial balance rules and requirements

To ensure your trial balance is correct and useful, it needs to follow a few key rules. Think of these as the basic requirements for getting it right.

• Debits must equal credits: This is the most important rule. The sum of all debit balances must exactly match the sum of all credit balances.
• It must include all ledger accounts: Every single account in your general ledger that has a balance must be listed on the trial balance.
• It represents a point in time: The trial balance is a snapshot. It shows the balance of accounts on a specific day, usually the end of an accounting period.

Common trial balance errors

Common trial balance errors include:

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

Even small trial balance errors can affect the accuracy of your financial statements and the decisions you make from them.

How to correct trial balance errors

How to fix trial balance errors:

• Double-check calculations: Review numbers thoroughly and get a second person to verify figures
• Verify source data: Confirm ledger figures are accurate before transferring to your trial balance
• : Tools like Xero prevent data entry errors and automate calculations

The importance of trial balances for small businesses

Trial balances help keep your business’s financial statements accurate. You’ll have more confidence that your numbers accurately reflect your business’s financial health, so you can meet your compliance requirements and make better-informed financial decisions.

Xero’s accounting software streamlines your accounting practices so you can easily record transactions, regularly prepare trial balances, and produce accurate financial reports with ease.

FAQs on trial balances

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

What are the three rules of trial balances?

Three fundamental trial balance rules:

• Debits equal credits: Total debit amounts must match total credit amounts exactly
• Use correct accounts: Follow your established chart of accounts consistently
• Enter data accurately: Ensure all figures transfer correctly from your general ledger

What are the three main purposes of a trial balance?

A trial balance has three main functions: to help identify mathematical errors in the books, to provide a consolidated summary of all account balances, and to serve as the starting point for preparing key financial statements.

What is a trial balance vs a balance sheet?

Both a trial balance and a balance sheet show important financial information about a business, but are used for different purposes and differ in scope. A trial balance is a bookkeeping report that simply lists the balances from the general ledger at a specific point in time. A trial balance’s purpose is to reveal any mathematical errors in a business’s double-entry accounting system, and is the first step to creating a balance sheet.

A balance sheet is a statement summarising a business’s entire financial position at a point in time. It includes an overview of the business’s value in terms of its assets, liabilities, and owner’s equity.

How do you prepare the trial balance?

Steps to prepare a trial balance:

1. Extract balances: Take all account balances from your general ledger
2. Organize by type: Place debit balances in the left column, credit balances in the right
3. Calculate totals: Sum each column and verify they match
4. Investigate differences: If totals don’t match, review ledger entries for errors

These steps produce an unadjusted trial balance. This is just the first step – you’ll next prepare your adjusted trial balance, and finally produce your post-closing trial balance once your financial reports are finalised.

A trial balance is less formal than other financial documents (like a balance sheet), so you can prepare one as often as you need to keep track of your business finances. Accounting software like Xero can automate the process for you so you can avoid clerical mistakes and effortlessly produce regular trial balances.