The trial balance uses data from all of the firm's open general ledger accounts. The "trial" itself compares two sums: total debits and total credits.
- When the firm applies double-entry principles correctly, total "debits" from all accounts must equal total "credits."
- A mismatch between trial debit and credit sums means that one or more accounts include errors or omissions.
When the trial balance fails, accountants search for several kinds of errors that might cause the mismatch:
- Firstly, a debit entry in one account did not bring an equal and offsetting credit entry in another.
- Secondly, some transactions either did not enter the system or else appear in inappropriate accounts.
- Thirdly, account balance calculations include other errors in data entry or mathematics.
The trial balance test, incidentally, is not comprehensive error checking. Quite a few other kinds of errors can enter the system while leaving total-debits equal total credits. As a result, the trial balance period calls for several different types of error checking besides the trial balance itself.
Explaining Trial Balance and Trial Balance Period in Context
Sections below further define and illustrate trial balance in context with related terms and concepts from the bookkeeping, accounting, and business analysis, emphasizing four themes:
- First, further definition of terms Trial Balance, Trial Balance Period, and Trial Balance Test.
- Second, the role of the Trial Balance Period in the Accounting Cycle.
- Third, finding and fixing accounting errors during the Trial Balance Period.
- Fourth, example Trial Balance Summaries for preparing definitive financial reports.
Trial balance and trial balance period refer to an error-checking step in the accounting cycle. The terms have meaning only in companies that use a double-entry accounting system.
Exhibit 1 below shows the significant steps in the accounting cycle. Firms complete the entire sequence once every accounting period. Here, note that accountants create a trial balance after posting all the period's transactions to the general ledger but before they transfer account balances to the period's financial reports.
Trial Balance in the Accounting Cycle
Exhibit 1 summarizes the sequence of steps in the Accounting Cycle.
- What is a trial balance?
- The trial balance period: Built-in error checking.
- Where is the trial balance period in the accounting cycle? What happens when the trial balance does not balance?
- Trial balance example calculations for creating a trial balance.
- Trial balance results become the new Income statement and Balance sheet.
- Finding, adjusting, and fixing trial balance errors. Trial balance finds some but not all mistakes.
The trial balance highlights a well-known advantage of the double-entry system—built-in error checking.
- Note that errors are more likely where accounting is still "by hand" or manual, with pencil and paper. Mistakes are less likely with computer-based systems, because modern accounting software runs several kinds of error checking, continuously, with every transaction.
- The trial balance can still overlook other kinds of accounting errors. It will not detect, for instance, transactions that should have been posted but were not. For more on these kinds of mistakes, see Finding Errors, below.
When the trial balance does not balance, accountants try to find and correct the error immediately. If the reason for the mistake is obscure or not easy to find, however, they may create temporary adjustments in specific accounts. These restore the debit-credit balance temporarily while they search for the problem.
The trial balance period is the time between final posting to the ledger and transfer of account balances to financial statements. And, they also to search for errors that the trial balance overlooks. The firm would prefer instead to find mistakes itself during the trial balance period, then having external auditors find them after publishing.
Total Debits Must Equal Total Credits
The debit and credit totals in the trial balance must match to build the new Income statement and Balance sheet correctly. Also, they must unearth and correct other material errors underlying the account balances during the trial balance period, as well. Also, they must find and fix other material errors underlying the account balances during the trial balance period, as well.
Trial Balance Period Also Includes Reconciliation
Note that the trial balance period also includes reconciliation, the process of checking account balances against other sources. Bank statements should agree with ledger balances for cash accounts, for instance. And, liability accounts for bank loans should coincide with the lender's account statements, and so on.
Good Reason for Rigorous Error Checking
Board members and corporate officers have good reason to be very sure that error checking is rigorous and thorough. The firm's financial statements will appear, for instance, in the Annual Report to shareholders. These reports will also to go to tax authorities, regulators, bond-rating firms, and potential lenders. In all cases, they must include a written "opinion" by external auditors. And, in most cases, the only acceptable opinion is the highest possible rating, an Unqualified opinion. All involved want to avoid a lesser opinion, "Qualified," or even worse, "Adverse."
The trial balance calculation has in view every active account from the company's chart of accounts and general ledger. Trial balance results will look like Exhibit 4, below, mainly a table of accounts and account balances.
- Note that each account carries one kind of balance only, either a credit balance or a debit balance.
- The table registers debit and credit balances in separate columns, and with column totals in the table's bottom row.
- The trial balance test, of course, occurs in the table's bottom row, where the two kinds of totals either match or do not match.
Note that this calculation does not require adding up every debit and every credit transaction from every account. The same results appear from merely adding the account balances from the general ledger, as in Exhibit 4.
Example Account Balance: Cash on Hand
Exhibit 2, below, helps explain the meaning of account balance in this context. Consider, for instance, just one account, "Cash on hand." Debit (DR) and credit (CR) transactions in this account have transferred from the journal to the general ledger. The ledger organizes transactions by account, in so-called "T-accounts," such as the example in Exhibit 2.
Note that total debits and total credits to a single account are not necessarily equal, either for the period or the account's entire history. Note especially that the difference between debit and credit totals across the account's history, represents the current account balance.
Debit and Credit Impacts in Different Kinds of Accounts
Exhibit 3, below, shows that two of the five major account types show debit balances, whereas the other three account types show credit balances. Note that the five account types belong to two higher level categories. These categories are as follows:
- Firstly, Balance sheet accounts.
These include (1) Asset accounts, (2) Liability accounts, and (3) Equity accounts.
These three account types make possible the Balance sheet equation:
Assets = Liabilities + Equities
- Secondly, Income statement accounts.
These include (4) Revenue accounts and (5) Expense accounts.
These two account types make possible the Income statement equation:
Income = Revenues – Expenses
Exhibit 3 also shows the impact of debit and credit transactions in each of account type.
|Exhibit 3. The five major kinds of accounts. A positive balance in Asset or Expense category accounts a debitbalance. A positive balance in a Liability account, Equity account, or a Revenue account, is a Credit balance.|
End of Period Balances for All Accounts
Now consider the account balances at the end of the period. At this point, all the period's transactions have posted to the ledger T-accounts. The "trial balance" account balance results appear below as Exhibit 4:
|Acct. No||Aerofirma Corporation Accounts |
Fiscal Year 20XX
|Debit Balance||Credit Balance|
|Asset Accounts - Current Assets|
|101||Cash on hand||12,700|
|139||Finished goods inventory||3,830|
|163||Factory manufacturing equipment||10,560|
|Liability Accounts - Current Liabilities|
|260||Bonds payable ||1,400|
|280||Bank loans payable||3,100|
|410||Product sales revenues||13,000|
|430||Rental property revenues||1,200|
|450||Interest earned revenues||300|
|Expense Accounts - Cost of Goods Sold|
|520||Raw materials costs||5,100|
|530||Direct labor costs||5,490|
|540||Indirect labor costs||3,730|
|550||Manufacturing plant costs||2,780|
|Exhibit 4. General ledger account balances for a company at the end of the reporting period. The trial balance test compares total debit balances total credit balances. In this case, the totals match, and the trial balance, therefore, does not reveal any accounting errors. (Note that for simplicity, this list of accounts is unrealistically short. Also for the sake of simplicity, the Exhibit does not include contra accounts, drawing accounts, depreciation expenses, or taxes.|
Passing the Test
In Exhibit 4, the trial sums in this example balance. That is because the total of debit balances equals the total of credit balances. The mathematics behind these results also mean that the sum of individual debit transactions equals the total of credit transactions.
A successful trial balance notwithstanding, accountants will still check carefully for the other kinds of accounting errors that do not impact a trial balance. Once they correct all mistakes, the account balances are ready for publication in the period financial accounting reports (see the final section in this article).
For the most part, line items on the period's Balance sheet and Income statement are nothing more than account names. This reality should be evident in Exhibit 4 above, for instance. And, figures reported for each item are merely the account balances.
In fact, when accountants are confident that the account balances are error-free, they build the new Balance sheet and Income statement directly from the list of accounts and their balances. Exhibit 5 and Exhibit 6 below show the results.
Example: Creating the New Income Statement
Consider first the revenue category accounts and expense category accounts. These are also known as "Income statement accounts," and they do indeed make up the Income statement contents. In the case of this simple example, using account balance figures Exhibit 4 above, the company's Income statement appears as Exhibit 5 below shows:
|Aerofirma Corporation Income Statement|
For Fiscal Year 20XX
|Product sales revenues||13,000|
|Services sales revenues||5,030|
|Rental property revenues||1,200|
|Interest earned revenues||300|
|Raw materials costs||5,100|
|Direct labor costs||5,490|
|Indirect labor costs||3,730|
|Manufacturing plant costs||2,880|
|Exhibit 5. The Income statement results as a table of Revenue and Expense accounts in the Exhibit 4 trial balance results.|
Example: Creating the New Balance Sheet
The remaining account categories (Asset, Liability, and Equity accounts) are called "Balance sheet accounts." These accounts and their balances do indeed make up the company's end-of-period Balance sheet, as Exhibit 6 below shows:
|Aerofirma Corporation Balance Sheet|
At the end of Fiscal Year 20XX
|Cash on hand||12,700|
|Finished goods inventory||3,830|
|Factory manufacturing equip.||10,560|
|Bank loans payable||3,100|
|Total owners equity plus inc||19,130|
|Total liabilities plus equity||29,980|
|Exhibit 6. The Balance sheet results as a table of Asset, Liability, and Equity accounts in the Exhibit 4 trial balance results.|
Net income, Retained Earnings, and Dividends on These Statements
Notice here that the "Net income" result from the Income statement appears in the current Balance sheet under "Owners Equity." When accountants finalize the Balance sheet, the net income value will indeed appear here, either as retained earnings or as dividends.
When the trial balance balances, as in the previous section, the Balance sheet will also balance. And, the Income statement will show correct net income.
If the "debit DR" and "credit CR" balance totals do not match in the trial balance exercise, there is an accounting error somewhere in the account balances. The firm will try to find the mistakes responsible for the mismatch, and correct them, before publishing financial statements. During the trial balance period, accountants will also search for and try to fix other kinds of accounting errors that the trial balance does not reveal.
Any material errors in the account balances they do not find and fix before publishing financial statements may result in an external auditor's opinion that is either "Qualified" or "Adverse."
The Trial Balance Reveals Some Kinds of Errors
A mismatch between debit and credit totals in the trial balance usually means that one or more transaction postings from journal to ledger are either in error or missing. Accountants may ultimately have to examine every debit-credit pair of journal entries to find the mistake.
There are, however, some well-known indicators for certain kinds of problems. These indicators help reveal specific errors without having to resort to a complete transaction-by-transaction review. For instance:
- If an account balance incorrectly appears as debit balance when it should be a credit balance (or the reverse), the difference between the debit total and credit total will be twice the value of this balance. And, the difference will divide evenly 2.
Therefore, when the accountant finds a trial balance difference divisible by 2, the first step is to look for an account balance exactly half the difference. That is most likely the misplaced balance.
- When the difference between debit and credit totals is evenly divisible by 9, this is a mathematical indicator that the account balances may include a transposition error in one of the accounts.
A debit balance that should be 12,578 may appear as something like 12,587, for instance.
- When the difference between debit and credit totals is divisible neither by 9 or by 2, it is possible that a single "debit" or "credit" balance is missing from the account lists.
Making Account Balance Adjustments
Because the trial balance must balance, accountants may also adjust specific accounts, so that total "debit DR" and "credit CR" balances match. Adjustments are not so much a matter of fixing errors, as they are improvements in the accounting accuracy. The intent is to match revenues and expenses more correctly to the appropriate period.
Adjusting entries to balance the trial balance typically impact two kinds of expense and asset category accounts: accrual accounts and prepayment accounts:
- Adjustments to accrual accounts (such as "accrued depreciation," or "accrued interest expense") are made to reflect more accurately the timing of actual expense accrual.
- Adjustments to prepayment accounts (such as prepaid insurance, office supplies, or floor space rental) help match the timing for using goods or services.
The Trial Balance is Blind to Other Kinds of Errors
The trial balance test does not detect the following kinds of errors.
- The paired debit and credit figures for a transaction may both match but still be incorrect. Such a mistake may be accidental, or it may be deliberate deception by the accountant. Either way, the trial balance is blind to the problem.
- Some transactions that should have entered the system have not. This mistake is an error of omission, not visible to the trial balance.
- The firm makes an entry as a debit to an account when it should have a credit, and its corresponding co-transaction registers as a credit when it should be a debit. Such a mistake is an error of reversal. When this happens, total "debits" still equal total "credits."
- The firm may enter a transaction in the correct kind of account (e.g., "Asset account" or "Expense account") but still choose an incorrect account within the category. The contributions total debits and total credits will be equal.
- Two or more errors in different accounts may be offsetting, to cancel each other. If, for instance, a credit transaction in one account is $100 too high, and if in another a debit transaction is $100 too high, the trial balance will still balance.
Remaining questions for auditors and regulators
If such errors enter the financial statements, the issues for auditors and regulators then have to do with materiality and intent.
- They will ask if the errors and their consequences are significant enough to mislead decision makers and investors. In other words, Are the errors material?
- They will also attempt to determine if the errors represent accidental oversights or deliberate distortion of financial results (see Materiality Concept).
For this reason, company management and accountants will use the trial balance period to rigorously search out and correct all accounting errors—whether they impact the trial balance or not.