A trial balance is an accounting tool that helps businesses determine if the double entry accounting system has any mathematical errors. Once the trial balance is worked through, and the total debits and total credits equal each other, we know there are no mathematical errors – but that doesn’t mean it is error free. It is important to determine how it is constructed and the considerations for each step in the process.
Raw Trial Balance
The first is the unadjusted trial balance. This looks at all the double entry bookkeeping journal entries, which records the business’ day-to-day transactions. When beginning to prepare for the adjusted trial balance, the eventual adjusted trial balance will have three column headers: 1. Account 2. Debit 3. Credit.
It should list all sub-ledger account balance totals, the account description and number, along with the final debit/credit balance. It also should document the accounting period, including the starting and final dates.
The next step is to address balancing for each sub-ledger. Sub-ledgers, such as Cash, Accounts Payable and Accounts Receivable, are balanced from the sub-ledgers’ “T” account; the resulting credit or debit balance must be noted. Depending on the resulting credit or debit balance, it must be put in the right “Debit” or “Credit” column. If there is a mathematical error, it means the previous steps in the accounting cycle might have errors in them.
Adjusted Trial Balance
Along with the trial balance having the credits and debits entered from each respective sub-ledger, the first thing to check is if the credit and debit balances line up. Then, the next step is to determine if other mistakes may exist. Examples of non-mathematical mistakes include:
- Original entry errors or double entry transactions that contain mistakes on both ends.
- Omission errors or errors that result from not being put into the accounting ledger.
- An error of reversal is an error with double-entry transactions that has the correct numbers but transposes credits and debits.
- A principal error is a transaction that correctly records the transaction, the figures, the right side (debit v. credit), but attributes it to the incorrect account.
Along with these potential mistakes, a business can identify and take corrective action when reviewing its transactions on specific accounts and when aggregating sub-ledgers into their trial balance. Examples of corrective action include tax adjustments, such as ensuring any tax deductions that were missed are then added.
If business transactions were made on a personal credit card, they need to be adjusted accordingly. When it comes to accrual considerations, if a payment is owed but not made during an accounting period, it must be adjusted to reflect the correct accounting period. Another consideration is for payments received, which is often referred to as a deferral. Past due payments that are applied to a later accounting period but were for a previous accounting period must be adjusted accordingly.
Conclusion
The last step is to prepare the post-closing trial balance. Once the closing entries have been finished, it can help a company use it as a starting point when they need to do it again for the next accounting cycle.
While trial balances are only a part of the bookkeeping and accounting process, taking steps to reduce errors can make the accounting process a more insightful business function.
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