If you are wondering what is a trial balance, it is a report that shows how much money is in all of a company’s general ledger accounts at a certain time. A trial balance shows all of the major accounts, such as assets, liabilities, equity, revenues, expenses, gains, and losses. Its main purpose is to find out what the balance of debits and credits entries in the general ledger are at a certain point in time.
Why does a Trial Balance Generated
A trial balance is generated in order to make the required adjustments and ensure that the general ledger is properly balanced. In order to verify that the total debits and credits remain in balance, it is prepared once more once the correcting entries are submitted.
This isn’t a formal financial statement in any way. It is often used within the corporation and not shared with anyone outside of the organisation.
What Does a Trial Balance Include?
All general ledger account totals are included in a trial balance.
- Having an account number, a description of the account, and a final debit/credit balance is essential for each account.
- This report should also include the date of the end of the accounting period in question. Because the general ledger shows all transactions by account, the trial balance only displays account totals, not individual transactions as they appear in the general ledger.
- Last but not least, the trial balance must reflect any adjusting entries. Assuming this is the case, it would be appropriate to display the numbers before, during, and after the adjustment.
Undetectable Errors in a Trial Balance
When it comes to calculations, A trial balance can show where the general ledger is wrong But there are a number of mistakes that this report can’t locate:
- Error of omission: The transaction was not recorded in the database
- Error of original entry: Both sides of the double-entry transaction are accounted in wrong way
- Error of reversal: Double-entry errors occur when the right amounts for both accounts in a transaction are entered, but the crediting or debiting account is entered in wrong way
- Principle error: The inputted transaction is a blatant violation of basic accounting standards. It’s possible that even though you typed in the correct amount and decided which side to use, you still selected the incorrect account type (e.g., expense account instead of liability account)
- Commission error: Accounts debited or credited are incorrectly reflected in the transaction’s total amount. However, commission errors are often the result of a lack of attention, whereas principle errors are the result of an inability to understand accounting concepts.
Conclusion
Without accurate financials, a business can’t properly perform any tasks. As such, the trial balance is an important report that provides a 360-degree snapshot into the company’s financial health. You can also gain knowledge about debtors turnover ratio formula while studying trial balance.
A trial balance lists each account in the company’s chart of accounts and breaks them down by their balance totals and subtotals according to recognized categories of expense and income.