A Trial Balance is an internal financial statement prepared from the balances of general ledger accounts. It presents the closing balances of various accounts as on a specific date. Each ledger account included in the Trial Balance normally carries either a debit balance or a credit balance, and these balances are placed in their respective debit and credit columns.
The primary purpose of preparing a Trial Balance is to check the arithmetic accuracy of the double-entry bookkeeping system. According to the accounting equation and double-entry principle, every financial transaction has equal debit and credit effects. Therefore, the total value of all debit balances in the Trial Balance should be equal to the total value of all credit balances.
If the total of the debit column is not equal to the total of the credit column, it indicates that an error may exist in the nominal ledger accounts or in the preparation of the Trial Balance. Such an error should be identified before the Profit and Loss Statement and Balance Sheet are prepared.
A Trial Balance is also important when adjustments are made in accounting records. Whenever an accounting adjustment is passed, the effect of the adjustment should maintain the equality of debit and credit. After adjustments, the Trial Balance should be checked to confirm that the total debit amount remains equal to the total credit amount.
The Trial Balance is generally prepared by a bookkeeper or accountant. Financial transactions are first recorded in daybooks and are subsequently posted to nominal ledger and personal ledger accounts. The balances of these ledger accounts are then used for preparing the Trial Balance.
The Trial Balance is an integral part of the double-entry bookkeeping system. It follows the basic debit and credit principles reflected in the traditional T-account format, under which debit values are presented on one side and credit values on the other side.
Normal Balances in a Trial Balance
A normal balance refers to whether a particular type of account normally has a debit balance or a credit balance in a properly prepared Trial Balance. The normal balance of an account is based on the accounting equation and the nature of the account.
The normal balances of different accounts are as follows:
| Account | Normal Balance |
|---|---|
| Assets | Debit |
| Liabilities | Credit |
| Equity | Credit |
| Owner’s Drawing | Debit |
| Retained Earnings | Credit |
| Revenue | Credit |
| Expenses | Debit |
If the normal balance of an account is reversed, such an account may be referred to as a contra-account. For example, accumulated depreciation is related to an asset but normally carries a credit balance. Similarly, owner’s drawings affect equity but normally carry a debit balance.
The total of the debit column and the total of the credit column of the Trial Balance should be equal. This equality is commonly described as the Trial Balance being “balanced.”
Closing the Books and Trial Balance
The expression “closing the books” refers to the process of reducing the balances of all revenue and expense accounts to zero at the end of an accounting period, usually a financial or fiscal year.
The difference between revenue and expenses is transferred to the retained earnings account. This accounting adjustment is known as a closing entry.
If the entity earns a profit, the retained earnings balance increases. If the entity incurs a loss, the retained earnings balance decreases.
After closing entries are completed, the resulting opening balances for the new accounting period should continue to maintain equality between the total debit and credit columns.
Therefore, the major purpose of the Trial Balance is to verify the mathematical equality of debit and credit balances and provide a basis for preparing financial statements and other financial reports.