What Is a Trial Balance and How Do You Prepare One?

A trial balance is an internal report, not typically seen by outsiders, that acts as a check on a company’s financial records. It is a worksheet that lists every account from the general ledger along with its final balance. The purpose of this document is to verify that the total of all accounts with debit balances equals the total of all accounts with credit balances. This process confirms the mathematical accuracy of accounting entries and serves as a preliminary step before creating formal financial statements.

The Foundation of a Trial Balance

The trial balance rests on the principle of double-entry bookkeeping, a system where every financial transaction impacts at least two different accounts. For every transaction, a debit entry must be recorded in one account, and a corresponding credit entry must be made in another. This ensures the accounting equation, Assets = Liabilities + Equity, always remains in balance.

All transactions are recorded in the general ledger, which is the central repository for a company’s financial data. The general ledger contains all the individual accounts a business uses, categorized into main types. These include asset accounts like Cash and Equipment, liability accounts such as Accounts Payable and Loans, and equity accounts representing the owner’s stake. Revenue accounts track income, while expense accounts track costs incurred.

For asset and expense accounts, a debit increases the account’s balance, while a credit decreases it. Conversely, for liability, equity, and revenue accounts, a credit increases the balance, and a debit decreases it. This opposing relationship ensures that the dual entries for any transaction maintain the overall balance of the accounting system.

How to Prepare a Trial Balance

The preparation of a trial balance begins after all business transactions for a period have been recorded in the general ledger. The first action is to determine the final balance of every single general ledger account. This requires calculating the net difference between all the debits and credits posted to that account.

Once every account balance is calculated, create a worksheet with three columns: one for the account name, one for debit balances, and one for credit balances. Each account from the general ledger that has a non-zero balance is listed on this worksheet. The final balance of each account is then placed in the appropriate column; asset and expense balances go in the debit column, while liability, equity, and revenue balances go in the credit column.

After listing all account balances, the debit and credit columns are summed up independently. The final step is to compare the two totals. If the accounting system has been maintained correctly, the total of the debit column will be equal to the total of the credit column, indicating the books are “in balance.”

For example, a simplified trial balance might look like this:

| Account Name | Debit Balance | Credit Balance |
| :— | :— | :— |
| Cash | $10,000 | |
| Accounts Receivable | $5,000 | |
| Equipment | $15,000 | |
| Accounts Payable | | $7,000 |
| Owner’s Equity | | $20,000 |
| Service Revenue | | $8,000 |
| Rent Expense | $3,000 | |
| Salaries Expense | $2,000 | |
| Total | $35,000 | $35,000 |

Correcting Imbalances

When the debit and credit columns of a trial balance do not match, it signals an error in the accounting records that must be located and corrected. The first check is to re-add the debit and credit columns to rule out a basic mathematical mistake. If the totals are still unequal, a systematic search for the error is required.

One common issue is the omission of an account, where a balance from the general ledger was simply forgotten and not transferred to the trial balance worksheet. Another frequent mistake is a transposition error, which occurs when two digits in a number are accidentally swapped, such as writing $81 as $18. A sign of a transposition error is when the difference between the debit and credit totals is divisible by 9.

A slide error is another possibility, where a decimal point is misplaced (e.g., $50.00 is recorded as $500.00). This type of error will also result in a difference divisible by 9. An accountant might also post a balance to the wrong column, placing a debit balance in the credit column. Finding this error involves reviewing each account on the trial balance to ensure its balance type aligns with its account category.

Limitations of a Trial Balance

A balanced trial balance confirms mathematical accuracy but does not guarantee that the financial records are completely free of errors. There are several types of errors that a trial balance cannot detect because they do not upset the equality of debits and credits.

For example, if a transaction was never recorded at all, both the debit and the credit are missing, so the totals will still balance. Similarly, if an entire transaction was accidentally entered twice, the books will remain in balance despite the duplication.

Another undetectable error involves classification. A transaction might be recorded for the correct amount, but in the wrong accounts. For instance, a debit to Repair Expense instead of Equipment would not create an imbalance. If a transaction was recorded with the wrong amount for both the debit and the credit entry, the trial balance would still balance perfectly.