A trial balance is a worksheet that shows the balances of ledger accounts of a business. When business transactions occur, supporting evidence is provided before they are recorded in their respective ledger accounts. After which, it is reflected in the trial balance (TB). But there is a need to understand what is in the TB. This article explains it.
The need to understand a Trial Balance
Technology has removed the need for accountants to prepare a TB. An automated spreadsheet (in MS Excel or Google Sheet), accounting software or an AI agent can provide a ready-made trial balance for use. This implies that it takes less time for preparers to prepare a set of financial statements.
The goal of a TB is to ensure the accuracy of the ledger accounts and their balances. Accounting software is garbage in and garbage out. So, if a ledger account is treated wrongly during input, the figure in the trial balance will be inaccurate. This will result in low-quality financial statements. Therefore, the accountant must understand the breakdown of a trial balance if he is to provide reports that are useful to decision makers.
Understanding a trial balance
A trial balance is generally made up of four columns. A column for the list of ledger accounts’ names, the second column for the category of accounts, and the third and fourth columns for the total debit and credit of each account.
The ledger accounts that contain the period transactions are listed in column one. This can include revenue, cost of sales, inventory, cash, bank, trade payables, and trade receivables. The second column shows the class of accounts each ledger account belongs to. For example, sales will be under operating income and trade payables are classified as current liabilities.
| Trial Balance Sample | |||
|---|---|---|---|
| Account Name | Category | Debit | Credit |
| PPE | Non-Current Assets | 10,000,000 | |
| Cash | Current Assets | 2,000,000 | |
| Bank | Current Liabilities | 5,000,000 | |
| Account Payable | Current Liabilities | 8,000,000 | |
| Account Receivable | Current Assets | 15,000,000 | |
| Equity | Equity | 5,000,000 | |
| Dividend | Equity | 300,000 | |
| Sales | Operating Income | 20,000,000 | |
| Cost of Sales | Operating Expenses | 8,000,000 | |
| Electricity | Operating Expenses | 700,000 | |
| Transport | Operating Expenses | 500,000 | |
| Profit/(Loss) b/f | Equity | 2,100,000 | |
| Total | 38,300,000 | 38,300,000 | |
The third and fourth columns of the trial balance show the debit and credit of each ledger account. So the total balance of the accounts should be in either the debit or the credit side. Note that the total debit must equal the total credit.
How to know if the ledger account should be a debit or a credit
The double entry principle is used to know the account that will be on the debit side or the credit side of the trial balance. Generally, assets, expenses, and drawings in equity (such as dividends) are on the debit side of the TB. While income, liabilities, and equity are on the credit side of the TB.
| Account | Balances |
|---|---|
| Assets | Debit |
| Expenses | Debit |
| Dividends | Debit |
| Liabilities | Credit |
| Income | Credit |
| Equity | Credit |
However, there are exclusions to the above rule. For example, a bank account is an asset to the business, but when it is overdrawn, it becomes a credit balance in the trial balance.
Importance of the trial balance to a business
Transactions accuracy
A trial balance ensures transaction accuracy. It checks the correctness of the amount entered in the accounting software. So, if a transaction amount is wrongly posted, it can be noticed and corrected.
Error discovery and traceability
If the trial balance does not have an equal amount in the total debits and credits, it implies that there is an error. This can be traced and corrected by the accountant. A trial balance is also useful to discover errors that exist but do not affect the account balances.
Financial statement preparation
It is from the trial balance that financial statements are prepared and presented to users for decision-making. If the TB is not accurate, it will affect the integrity of the statements.
Required in tax audit
External auditors request the TB during the audit. It is useful for audit trails. Also, tax auditors from the National Revenue Service (NRS) will request a trial balance during a tax audit.
| Importance of Trial Balance | Summary |
|---|---|
| Transactions Accuracy | Verifies that amounts are correctly entered; allows for identification and correction of posting errors. |
| Error Discovery & Traceability | Detects imbalances between debits and credits; helps trace errors and identify issues not affecting total balances. |
| Financial Statement Preparation | Serves as the foundation for financial statements; ensures the integrity of reporting for decision-making. |
| Required in Tax Audit | Facilitates audit trails for external auditors and is required documentation for tax authorities (NRS). |