What it is for
The Institute of Certified Bookkeepers defines a trial balance as a list of account balances taken from the divisions of the ledger in a double-entry system, in which total debit balances should equal total credit balances (ICB). ACCA's Financial Accounting syllabus covers its purpose, its extraction and its limitations (ACCA FA study guide).
The trial balance is the starting point for the accounts. Each balance is mapped to a line in the profit and loss account or balance sheet, the year-end adjustments are added, and the result is the statutory accounts and the figures for the tax return.
A short trial balance
| Account | Debit £ | Credit £ |
|---|---|---|
| Computer equipment at cost | 3,000 | |
| Computer equipment, accumulated depreciation | 1,000 | |
| Trade debtors | 4,200 | |
| Bank current account | 6,350 | |
| Trade creditors | 1,900 | |
| VAT | 1,450 | |
| Share capital | 100 | |
| Retained profit brought forward | 2,600 | |
| Sales | 28,000 | |
| Purchases | 9,800 | |
| Rent | 6,000 | |
| Depreciation | 1,000 | |
| Bank charges | 200 | |
| Accountancy | 4,500 | |
| Totals | 35,050 | 35,050 |
The figures are illustrative. Assets and expenses carry debit balances. Liabilities, capital and income carry credit balances. The profit for the year is sales of 28,000 less expenses of 21,500, giving 6,500, which the year-end transfer moves into retained profit.
Errors a trial balance reveals
- A one-sided entry, where only the debit or only the credit was posted (ACCA: suspense accounts).
- Both sides posted as debits, or both as credits.
- A figure transposed on one side only, for example 540 debited and 450 credited.
- An addition error on an account or on the trial balance itself.
Errors a trial balance does not reveal
- Omission: the transaction was not posted at all (ACCA: suspense accounts).
- Error of principle: the right side of the wrong type of account, such as a van posted to motor expenses.
- Error of commission: the right side of the wrong account of the same type, such as rent posted to rates.
- Reversal: the right accounts with the debit and credit swapped.
- Error of original entry: the wrong figure posted to both sides.
- Compensating errors that cancel each other out.
Using the trial balance at a period end
Extract it
Run the trial balance at the period end date, before any year-end transfer.
Check it balances
If the totals differ, or anything sits in suspense, investigate before going further. See suspense accounts.
Reconcile the balance sheet accounts
Agree bank to the bank reconciliation, debtors and creditors to the sales and purchase ledgers, VAT to the return, PAYE to the payroll, loans to lender statements and the directors' loan accounts to what the directors agree.
Review the profit and loss accounts
Compare with the previous year and look for costs coded to the wrong account, missing months and capital items in expenses.
Post the adjustments
Post accruals and prepayments, depreciation, stock and corporation tax by journal.
Map and prepare the accounts
Map each balance to its line in the accounts and prepare the statutory accounts from the final trial balance. See what statutory accounts must contain.
Questions
What is an extended trial balance?
A working paper that adds columns to the trial balance for adjustments, then the profit and loss account and balance sheet. Each adjustment is entered on both sides, and the final columns give the figures for the accounts.
Can a trial balance from another package be used?
Yes. A closing trial balance from the client's previous software, or from a bookkeeper's package, can be imported and mapped to the lines of the accounts, or entered as opening balances to start new books.
What is the difference between an opening and a closing trial balance?
A closing trial balance is extracted at the period end after all adjustments. The opening trial balance for the next period carries forward only the balance sheet accounts, with the year's profit or loss moved into retained profit or the capital account, so every income and expense account starts at nil.
Why might an imported trial balance not balance?
The export may have left out a zero or small balance, rounded figures to whole pounds, or split one account across two lines with the same code. Compare the import with the source report line by line, and post any remaining difference to suspense only while it is traced.
Does a balancing trial balance mean the books are right?
No. It proves the arithmetic of the double entry. Omitted transactions, entries in the wrong account and reversed entries all leave it in balance. The balance sheet accounts are reconciled to outside evidence and the profit and loss accounts are reviewed to find those.
In Accountin
In Accountin the trial balance report runs for any dates, with or without the year-end transfer, and a trial balance from other software can be imported and mapped to the accounts.
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