A Trial Balance is a statement that consists of Statement of Financial Position (Balance Sheet) and Statements of Comprehensive Income (Profit and Loss).
To interpret your company financial condition, you need to prepare a trial balance.
The trial balance is a summary of the ending balances of the whole list of accounts (or the Chart of Account) in your General Ledger. It should be prepared at the end of accounting duration, possibly the end of the year, month or quarter.
How to Prepare the Trial Balance
- Prepare a worksheet with three columns: for account names, debit quantity and credit quantities.
- Total up the credit amounts and debit amounts for each ledger account separately. These ledger accounts consist of cash, accounts payable, and more.
- If the quantity on the debit side of an account is higher than the credit quantity, post the difference in the credit column of the trial balance.
- Repeat this step for every account.
- After you have input all the account balances, total up each column of the trial balance. Remember that the total of the credit column needs to be the same as the debit column.
Nevertheless, an effective trial balance does not indicate that there are zero mistakes in your books. It merely shows that you have entered all the transactions in the trial balance.
Balanced Trial Balance
The credit, debit total (Also see Understanding credit and debit in the business) and grand total would be equal if you post all the journal entries in the general ledger without errors, and after that transfer the right information from the general ledger to the trial balance (Also see Tips for maintaining proper accounts).
A trial balance can still be balanced when there are mistakes.
- Failed to transfer correct information from journal to general ledger
- The omission of the whole transaction in general ledger or journal
- You published a transaction in the incorrect account
- You recorded a transaction two times either in the journals or the general ledger
This is why a balanced trial balance does not suggest it is mistake-free as discussed above.
Unbalanced Trial Balance
Unbalanced trial balance indicates that there is a mistake in accounting. Given that you will make use of the details in the trial balance in the preparation of financial statements, you must find out the mistake before you proceed with your accounting procedure.
The primary reason for unbalanced is that the total quantity debited is different from the total amount credited in any single accounting entry. With the accounting software application we have now, it is nearly difficult to publish an “unbalanced” entry that leads to this mistake.
Preparing a trial balance on a certain basis implies that you will have a few transactions to post and in case you make any mistake, it can be detected easily. You may engage any accounting service in Johor Bahru to assist you in preparing trial balance and keeping your accounting process organised.