Coming back to the concept of Trial Balance it is a listing of all balances of all accounts used in the accounting to classify financial data. This listing is divided into debit & credit columns, i.e. debit balance are showed in the separate column from credit balances. Totals of both sides are also calculated and presented.
The main use of Trial Balance is preparation of Financial Statements, i.e. this listing of all accounts with balances is used to prepare Balance Sheet and Income Statement.
The other important use of Trial Balance is testing of double entry accuracy, i.e. testing whether transactions were recorded correctly in the General Ledger accounts and whether Debits equal to Credits. The following errors can be revealed:
- non-correspondence of Debit & Credit, i.e. when total Debits are not equal to total Credits, it is an indication that mistakes were made while recording transactions in the General Ledger
- errors in computation of balances of accounts, i.e. here again we will not have equality between Debits & Credits due to wrong computation
- omission of account balance
- errors in extraction of trial balance
The following errors are not revealed in preparation of Trial Balance:
- omission of transaction, i.e. if transaction was not recorded at all, such error will not be revealed
- entries on wrong accounts, i.e. if transaction in respect of double entry was recorded correctly, however wrong accounts were debited and credited, such error will also not be revealed since total Debits will equal to total Credits
Step 14 Trial Balance and under this step we will be preparing trial balance and let’s start from the process how it is done. In order to prepare trial balance we need a list of all general ledger accounts which are used by the business for the accounting purposes. The next step is to calculate balances of all the accounts and this was done in previous videos when we were calculating balances of all accounts for the company Zeta.
Our next step is to collect those balances and make a list of debit and credit balances and together with the names of their accounts so we have a list and usually we will have a separate column from the names of the accounts separate column for debit balances and separate column for credit balances in order to present those items separately and clearly. The next we will be calculating total value of debit balances and total value of credit balances.
So total value of column for debits and total value of column for credit balances. Then the last step we will e comparing those amounts we will need to have a balance so and the quality here. If those amounts are not equal this means that trial balance was prepared incorrectly and we will be searching from mistakes. However, there might be an equality but still we might have done mistakes and those mistakes we will need to know them and to take them into account and those mistakes might be the following so we might completely miss transactions so transaction can be recorded in the general journal but it was not posted to the general ledger account.
There was a correct posting made but we have used the wrong account and referred a type that there was we might make a mistake by making entry on the wrong side for example instead of debit on the credit side and made the same compensating mistake by another amount of debit or credit so those mistakes are not seen from the trial balance however we need to check everything and to post the transactions from general journal correctly and they are carefully noted to avoid those mistakes.
So let’s come to the layout of the trial balance. I have mentioned a little bit about that and trial balance it includes a list of all the balances all the accounts which are included in the general ledger and the trial balance is prepared at the end of accounting period as of particular date and it has two columns where the balances are indicated. One column is for debit balances and here we include all the general ledger accounts of the balances of the general ledger accounts which have debit balances.
So these are assets and expenses and another column is credit column and here we include all the general ledger accounts and the balances which have final balance on the credit side so it is liability share capital and income and next step is to see how trial balance for our company Zeta looks like but before that again please remember the total amount of balances in the debit column should equal to the total amount in the balances in the credit column and this is a trial balance for our company Zeta and here you can see that there are three columns.
Two columns for data and one column is for the list and names of their accounts so in their account name column we will list all the accounts which were impacted by the transactions for company Zeta we start from asset category accounts and we continue with liabilities like accounts payable and equity like share capital income and expenses.
After we do that list we put all the balances from their accounts which have closing balances on the debit side and the debit column of the trial balance. So it is prepared insurance it is cash. It is cash and bank account receivable inventory stationary office space and expenses.
All of these accounts we have closing balances on the debit side and we include them into the debit column of the trial balance. The other column credit column here we include balances of those accounts which have closing account on balance on the credit side and these accounts are accounts payable, share capital and income.
They relate to the right side of accounting equation and have closing balances on the credit side. After we do that we calculate total amount or total sum of all the debits in the debit column and we calculate total amount of credit balances and you can see that total value of debit column is $33,000 and the same amount you can see on the credit column.
So this means that all the posting to the general ledger was done correctly. We have posted all the transactions and all the entries correctly and we have a balance between debits and credits so trail balance must prepare correctly. This was the final step for trial balance preparation and next we will be covering adjusting entries which need to be done at the end of the accounting period.