How to Prepare an Accurate Trial Balance for Business Finance

Financial reports serve as the main guide to ensuring a business runs smoothly. Without neat and accurate record-keeping, it is difficult to determine whether a business is growing or facing challenges. 

One crucial step in preparing accurate financial statements is the trial balance. If this report is unbalanced, it means there are errors that need to be corrected before proceeding to the next stage.

In this article, we will delve deeper into what a trial balance is. Let’s take a closer look!

What Is a Trial Balance?

A trial balance is also known as a balance ledger. A trial balance is a report that systematically records the balances of all accounts in the general ledger according to the company’s account codes. The primary purpose of preparing a trial balance is to ensure the balance between total debits and credits at the end of the accounting period.

A trial balance acts as an initial verification tool in the bookkeeping process, where all account balances in the ledger are categorized into debit and credit columns that must be balanced. If there is an imbalance, it indicates a recording error that needs to be corrected.

Simply put, a trial balance is a summary of account balances in the ledger for a specific period. This report is typically prepared periodically (usually at the end of the reporting period) to ensure that all transactions have been recorded correctly.

However, it is important to understand that a trial balance is not an official financial statement. The results of this calculation are used internally as an initial step before preparing more comprehensive financial reports and are not shared with external parties.

Functions of a Trial Balance

A trial balance plays a vital role in the accounting process. Its main function is to ensure the balance between debit and credit balances, helping to identify potential miscalculations. However, it is important to note that balance does not always mean the accounting system is error-free, for instance, if there are missing transactions in the bookkeeping.

Here are some important functions of a trial balance:

1. Displays the overall ledger balance to facilitate financial analysis.
2. Helps detect miscalculations and ensures more accurate transaction records.
3. Corrects accounting transaction calculations to maintain financial data accuracy.
4. Simplifies the preparation of financial statements such as cash flow statements, profit and loss statements, and balance sheets.
5. Records all data in account records to ensure all information remains well-documented.
6. Monitors accounts in financial reports, making it a useful tool for financial oversight.
7. Verifies bookkeeping accuracy as an initial step before further analysis.

Types of Trial Balances

A trial balance is divided into three types, each serving different functions. Here’s an explanation:

1. Unadjusted Trial Balance

This trial balance is created after all transactions have been recorded and posted to the general ledger. The balance of each account is then transferred to the trial balance list to ensure the balance between debit and credit.

This report helps detect potential recording errors before the financial report audit process is carried out. If there is an imbalance, it indicates recording errors that need to be corrected.

2. Adjusted Trial Balance

This trial balance is prepared after adjustments are made to certain accounts. In the accrual-based accounting method, some accounts require adjustments to make financial statements more accurate and reflect the actual condition.

If this process is skipped, the resulting financial reports may be invalid because they do not account for necessary adjustments.

3. Post-Closing Trial Balance

A post-closing trial balance ensures that the ending balance from the previous period has been correctly transferred to the next accounting period. After closing journal entries are made, the active account balances are recorded in this report.

All recorded balances must match the ending balances of the previous period, ensuring data accuracy for the next accounting period.

Read more: Understanding Why the Balance Sheet is Crucial for Business Success

Trial Balance Methods

In preparing a trial balance, there are three main methods used: the total method, the balance method, and the combined method. All three serve to ensure the balance between debit and credit before further recording. Let’s explore the details!

1. Total Method

This method sums up the total debit and credit accounts from the general ledger and records them in the respective columns in the trial balance. The balance between both sides serves as an indicator that the recording is accurate.

The advantage of this method is that it is faster since it directly uses the total accounts. However, the total method does not provide information about the ending balance of each account, making it less ideal for preparing final financial reports.

2. Balance Method

The balance method only records the difference or ending balance of each account in the general ledger. This method is more commonly used because it simplifies financial statement preparation and provides a clearer picture of the company’s financial position.

In practice, asset accounts, expenses, cash balance, bank balance, and losses are entered into the debit column. Meanwhile, liabilities, revenue, equity, and profit are recorded in the credit column.

3. Combined Method (Total and Balance)

This method combines the total and balance approaches by providing two columns: one for total debit and credit transactions and another for their final balances. This method helps reconcile data in the general ledger while providing more comprehensive information.

By understanding the differences between these three methods, you can choose the approach that best suits your company's financial recording needs.

How to Prepare a Trial Balance

Now, let’s discuss how to create a trial balance, which is very useful for businesses in managing their finances more effectively. Here are the steps to prepare a trial balance efficiently:

1. Record all company financial transactions in detail, both debit and credit.
2. Enter these transaction data into the general ledger for a specific period.
3. Create a trial balance to check the alignment between the total debit and credit in the ledger.
4. Prepare a worksheet with four columns: account number, account name, debit, and credit.
5. Fill in these columns with the account name and corresponding total balances.
6. Sum up the debit and credit columns, ensuring both are balanced.
7. If the results are balanced, the trial balance can be closed.
8. If there is a discrepancy between total debit and credit, immediately identify and correct the errors.

Once you understand how to prepare a trial balance, refer to the following example for better clarity:

Source: blog.peakflo.co

Read more: Understanding Different Types of Sales Reports and How to Create Them

Conclusion

A trial balance is a crucial step in ensuring a business’s financial reports remain accurate. 

By understanding its functions, types, and preparation methods, businesses can avoid recording errors and create more precise financial statements.

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ESB Core is designed to help businesses manage inventory, cost of goods sold (COGS), stock across branches, and financial reports such as balance sheets, profit & loss, trial balance, and cash flow management more efficiently. Let’s consult and simplify your business financial reporting today!