What is a trial balance?

What is a trial balance?

A trial balance is a financial report showing the closing balances of all accounts in the general ledger at a point in time. Many businesses create a trial balance as the first step in closing their books at the end of an accounting period.

The trial balance definition is exactly that – it’s a trial where you test books to check there aren’t any fundamental errors in them before preparing financial statements or doing a full financial audit.

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

In the accounts column, list the names of your accounts (you can omit accounts that you haven’t used during the period); in the debit column put your debit balances, such as assets and expense accounts; and in the credit column you enter your credit balances – like your liabilities, capital, and income.

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.

As explained above, 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. As you can see, the debit and credit columns total the same amount.

Types of trial balances

There are three types of trial balances: the unadjusted trial balance, adjusted trial balance, and the post-closing trial balance.

Each type follows the same format but happens at a different stage of the accounting process:

• The unadjusted trial balance happens first and is an informal way to gather the data needed to start closing the books at the end of an accounting period. It is a useful way to check for obvious accounting errors and to spot any entries that need to be adjusted.
• Next is the adjusted trial balance, which needs to include correctly adjusted entries as you’ll use it to prepare your financial statements.
• The post-closing trial balance is next, which ensures the ledger is ready 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 takes this unadjusted trial balance and makes any adjustments needed, such as accruals (like adding unpaid bills), deferrals (recognizing income only when it’s earned) and depreciation (spreading the cost of an asset like a vehicle 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 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.

Common trial balance errors

It’s easy to make simple mistakes when preparing your trial balance, so watch out for:

• Transcription errors – data entry mistakes like mistyping $500 as $5,000
• Omission errors like leaving transactions out of the accounts
• Misclassifications, like recording transactions under the wrong account headings

Small trial balance errors like these can lead to big financial headaches down the road. Minor mistakes can alter your financial statements and lead to business decisions that are based on incorrect information.

How to correct trial balance errors

Thankfully, simple mistakes are easy to fix.

• Recheck your trial balance: check your numbers thoroughly. Take a break and come back to your numbers fresh, and get a second pair of eyes to check for typos.
• Verify your ledger: check your ledger figures are correct before inputting them into your trial balance, and re-verify any figures that could be unreliable.
• Use accounting software: accounting tools like Xero can prevent mistyped entries and speed up your calculations, leaving you more time to check that every item is accurate.

The role of trial balances in financial statements

Accountants use trial balances to prepare balance sheets and other financial statements, and are an important document for auditors.

The purpose of a trial balance is for your bookkeeper or accountant to check your business’s general ledger accounts balance – that is, the account balances accurately reflect your business’s financial position.

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. Here's more information on FASB accounting standards.

FAQs on 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 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 summarizing 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?

When first preparing a trial balance:

1. Take your general ledger (where all your company’s transactions are recorded) and separate out all the transactions within the trial balance format: record the debit balances in the left column, the credit balances in the right column.
2. Sum up each column and check if they’re equal. If they are, it suggests there aren’t mistakes in your accounting. But if they differ, check your ledger entries for mistakes.

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.

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.