The trial balance can be considered as a report that is prepared at the end of a specific financial period indicating the ending balances of each account. The following article discusses the purpose of preparing a trial balance, the trial balance format, and the usage of a trial balance.
What is the purpose of preparing a trial balance
Trial balance is prepared to ensure that all the debit balances tally with all the credit balances. Trial balance is useful in ensuring the accuracy of the financial statements. The auditors refer to these reports at the initial stage in order to ensure the accuracy.
In some situations, even though the debits and credits are equal, it cannot be predicted that there are no errors in the trial balance. Same entry can be recorded twice in the trial balance mistakenly, and the transaction can be recorded with wrong figures. In these kinds of situations, it is difficult to tackle the recording errors by only looking at the trial balance.
Trial Balance Format
The format of a trial balance can be illustrated with the following example.
Here, under each of the account titles, it contains the closing balance of each and every account. Also, when adding the columns of debit and credit, the total amounts derived at each of the columns should be equal.
How to prepare a trial balance from ledger
To prepare a trial balance from ledger, following Steps can be followed.
- At the end of the period, close all the Ledger Accounts
- Then post the Ledger balances into the trial balance
- Sum up, and identify the Trial Balance errors, if any
- Create a suspense account for temporary use, in order to rectify the errors
- Then make adjustments to correct the errors
How to prepare an adjusted trial balance
The initial prepared trial balance is known as unadjusted trail balance and when the errors are identified and corrected according to the Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS), it is known as the adjusted trial balance.
The trial balance consisted of the closing balances of all the accounting records. As the adjustments are made after reviewing the entries of the respective transactions, it can be said that the trial balance is followed an adjustment process in order to convert it to an adjusted trial balance.