If you have ever wondered what is trial balance, don’t worry it is a concept that could confuse even the most experienced accountants. So we will explain it to you in detail.
Trial balance is the summarized balance sheet at the end of a given period. A trial balance facilitates verification of the closing process by matching revenue and expenditures to the company’s obligations. Hence it could be seen as a summary of credit and debit. The process is aimed to ensure that there are no discrepancies or errors in recording transactions.
When you’re a small business just starting out, there are a lot of important tasks you need to attend to. One of them is making sure your bookkeeping system is accurate and that you know where all your money is at any given time. A trial balance is one tool for helping your business achieve this. The following article will help answer some common questions about trial balances.
The significance of trial balance
- You may have heard that a trial balance is a listing of all the accounts in a company. Well, yes and no. A trial balance is a list of all the accounts in a company. But you should understand that each account has a number of sub-accounts, and these sub-accounts are listed separately.
- A trial balance does not indicate whether transactions are correct or incorrect; it only determines whether double-entry bookkeeping principles have been applied appropriately to ensure that transactions have been accurately recorded
- Trial balances can be prepared in several ways. Debits and credits can be listed in separate columns down the left side of a sheet of paper or on separate lines in a worksheet or spreadsheet program such as Microsoft Excel. Or they can be listed on a single line by reversing the format so that credits (items with a plus sign) appear first. This trial balance shows debits first because it is commonly used when preparing financial statements for external reporting purposes
- The total debits equal the total credits on a trial balance because debits and credits are always balancing themselves out.
How is a trial balance made?
Trial balances are typically prepared monthly or weekly by accountants at each level in a company’s internal accounting structure after all required journal entries have been made. This information is usually prepared using the same chart of accounts and hierarchy used in the company’s general ledger. Because this process is used for internal control and financial reporting purposes, there are company standards for how a trial balance must be prepared based on accepted accounting practices. This is why when dealing with trial balance even the minutest of things like cost sheet format become extremely important. Click here to learn about it.
All transactions require the use of the general ledger, which consists of a number of accounts. Each account provides a place to keep track of a specific type of transaction. For example, one account may be used for recording cash received from customers, and another may be used for recording cash paid to suppliers.
Refunds are recorded in the customer ledger account or accounts to which the credit transaction was originally posted. If the refund is issued directly to customers, it appears on the cash receipts journal as a debit to customer ledger accounts and a credit to a cash account. If the refund is made by check drawn on the business’s checking account, it appears as a debit to cash and a credit to customer ledger accounts (or some combination thereof).
Cash disbursements are recorded in the general ledger under two headings: Assets and Expenses. This information is transferred to the cash disbursement journal as debits to these respective accounts