Trial Balance — is a document with data of all ledgers in the company at a certain period. It includes the balance at the beginning and the end of the period, and debit and credit for each account. This document reflects all assets, revenues, expenses, and losses. Trial balance allows the accountant to create the presence of entries and check the miscalculations.
Definition of Trial Balance
The trial balance is drawn up for a defined period. It looks like a table, where debit, credit are indicated. Also, it includes the column «Particular». The column «Particular» includes main expenses: salaries, inventory, taxes, rent, cost of goods sold, revenues, debts, etc.
The trial balance shows only the totals and not the separate transactions. Sometimes this document may have the columns opening balance, turnovers, and closing balance. Each column should be divided into the subsections debit and credit.
The main function of the trial balance is to check the correspondence between the debit and credit: debit and credit should always balance each other (double-entry). Double entry is a method of accounting where each change in the organization's funds is reflected in at least two accounting records, providing an overall balance. Debit is on the left side of the accounting record. It shows the payments. Credit is on the right side, and it shows the expenses.
The trial balance is usually formed to analyze the company’s finances at a certain date and as a part of income statement. In certain situations the tax authorities can ask to provide the trial balance (in-office audit) in case of detection of errors, inconsistencies and contradictions in the verified tax declaration.
Sometimes the trial balance is mistaken for the balance sheet, but they are different documents. The trial balance summarizes the expenses and payments on a certain date. The balance sheet is the final summary table reflecting the current financial state of the company. Trial balance is created for inner utilization. The balance sheet is created for the investors and auditors. The trial balance has several important functions that are necessary for management accounting. It is necessary to understand the current state of a company's finances.
Functions of trial balance:
- collection and systematization of accounting data for a certain period;
- verification of the mathematical calculations;
- providing data for profitability analysis;
- providing data for budget planning;
- preparation of annual financial reports and statements.
Creation of Trial Balance
There is an order for drawing a trial balance, and an algorithm of professional accounting software follows it. The numeric data entered into the program should be accurate and complete. The lack of data leads to discrepancies in the debit/credit balance.
How to create the trial balance:
- Take the balance of all accounts at the beginning of the period from the statement for the previous period.
- Collect debit and credit turnovers on all accounts and enter them into the document.
- Calculate the balance on all accounts at the end of the period.
- Reconcile the balance at the end of the period for each account with the accounting records. The following things should be equal for the debit and credit: opening balance, turnover, and closing balance.
- Draw up the trial balance and indicate the name of the company, name of document, period, and calculated data.
- Check if there are any mistakes in the document.
- The created document should be certified by the person who had it drawn up.
Why Is Important to Draw Up Trial Balance
The trial balance is a very important thing for the company. It allows the management to control the financial state of the company and identify the unpaid debts. The missing and unpaid debts can lead to lawsuits and loss of money. Also, it helps to identify unnecessary expenses. Usually, these expenses are hospitality expenditures.
Unfortunately, the trial balance doesn’t help to identify all types of discrepancies. The timely entry is essential for the trial balance. If a certain financial operation won’t be indicated, it will be hard to justify this expense. Other hard-to-trace intermittent errors are the clerical ones (typos). Typos can be identified, if another person checks the document and looks through them with a fresh eye.
To prevent the various errors it is necessary to use professional accounting software. There are several online services but for the accounting of the company, it is better to obtain licensed software. The pirate software often has different bags and problems with the installation. Before obtaining the software the bookkeeper may use the program during the free trial period to test its functions. Some opportunities may be locked during the trial period, but the main functions are available. The professional software allows the company to avoid the mistakes related to human factors (clerical errors, methodological errors, missing entries). These programs can draw up the trial balance very quickly.