how a trial balance works
preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double entry accounting system if the total debits equal the total credits the trial balance is considered to be balanced and there should be no mathematical errors in the ledgers however this does not mean that there are no errors in a company s accounting system for example transactions classified improperly or those simply missing from the system still could be material accounting errors that would not be detected by the trial balance procedure requirements for a trial balancecompanies initially record their business transactions in bookkeeping accounts within the general ledger depending on the kinds of business transactions that have occurred accounts in the ledgers could have been debited or credited during a given accounting period before they are used in a trial balance worksheet furthermore some accounts may have been used to record multiple business transactions as a result the ending balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered to that account based on all related business transactions a company s transactions are recorded in a general ledger and later summed to be included in a trial balance at the end of an accounting period the accounts of asset expense or loss should each have a debit balance and the accounts of liability equity revenue or gain should each have a credit balance however certain accounts of the former type also may have been credited and certain accounts of the latter type also may have been debited during the accounting period when related business transactions reduce their respective accounts debit and credit balances an opposite effect on those accounts ending debit or credit balances on a trial balance worksheet all of the debit balances form the left column and all of the credit balances form the right column with the account titles placed to the far left of the two columns types of trial balancethere are three main types of trial balance all three of these types have exactly the same format but slightly different uses the unadjusted trial balance is prepared on the fly before adjusting journal entries are completed it is a record of day to day transactions and can be used to balance a ledger by adjusting entries once a book is balanced an adjusted trial balance can be completed this trial balance has the final balances in all the accounts and it is used to prepare the financial statements the post closing trial balance shows the balances after the closing entries have been completed this is your starting trial balance for the next year trial balance vs balance sheetthe key difference between a trial balance and a balance sheet is one of scope a balance sheet records not only the closing balances of accounts within a company but also the assets liabilities and equity of the company it is usually released to the public rather than just being used internally and requires the signature of an auditor to be regarded as trustworthy a trial balance is a less formal document there are no special conventions about how trial balances should be prepared and they may be completed as often as a company needs them a trial balance is often used as a tool to keep track of a company s finances throughout the year whereas a balance sheet is a legal statement of the financial position of a company at the end of a financial year special considerationsafter all the ledger accounts and their balances are listed on a trial balance worksheet in their standard format add up all debit balances and credit balances separately to prove the equality between total debits and total credits such uniformity guarantees that there are no unequal debits and credits that have been incorrectly entered during the double entry recording process however a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes if equal debits and credits are entered into the wrong accounts a transaction is not recorded or offsetting errors are made with a debit and a credit at the same time a trial balance still would show a perfect balance between total debits and credits 1