Trial Balance: Definition, Preparation and Error Checking

Key Takeaways

The Trial Balance is an internal report that presents all the company’s general ledger accounts and their balances at a point in time.
The 3 types of trial balances are Unadjusted Trial Balance, Adjusted Trial Balance and Post-closing Trial Balance. Each type is prepared separately throughout the accounting cycle and each serves a different purpose.
The trial balance helps to ensure that total debits and total credits are equal. It also helps detect any computational errors that may have been committed as transactions are recorded.

Overview of the Accounting Cycle

The preparation of the trial balance is performed several times during the accounting cycle of the business. It is prepared prior to recording adjusting entries, after posting the adjusting entries and after posting the closing entries.

The Accounting Cycle refers to the steps that a company takes to prepare their financial statements. Below are the steps in the accounting cycle, done in the following order:

Gathering of business source documents
Analyzing and journalizing business transactions
Posting journalized transactions to the ledger
Preparing an unadjusted trial balance
Journalizing and posting adjusting entries
Preparing an adjusted trial balance
Preparing the financial statements
Journalizing and posting closing entries
Preparing a post-closing trial balance
Journalizing and posting reversing entries

Introduction to the Trial Balance

The trial balance is an important internal report and working paper that is prepared several times at the end of an accounting period.

What is a trial balance?

A Trial Balance is a worksheet, which also serves as an internal report, that contains a list of general ledger accounts and their account balances at a given point in time.

Below is an example of a trial balance layout.

The trial balance contains all of the general ledger accounts of your company, their respective account numbers and any ending debit and credit balance of each account. However, only the accounts with ending balances are presented in the trial balance.

In the trial balance, the ledger accounts are typically arranged in the order from which they appear in the chart of accounts and general ledger, with assets being listed first, followed by liabilities, capital, income, and expenses.

Types of trial balance

If you have noticed above, the trial balance is prepared three times throughout the accounting cycle. This results in three types of trial balances: the unadjusted trial balance, the adjusted trial balance and the post-closing trial balance.

Unadjusted Trial Balance – prepared after all of the transactions during the period have been posted to the general ledger and prior to the preparation of adjusting entries. The term unadjusted means that the ledger accounts do not reflect any adjustment in their account balances yet.
Adjusted Trial Balance – prepared after all necessary corrections and adjustments have been made in selected ledger accounts. This is also prepared prior to the preparation of the financial statements.
Post-closing Trial Balance – prepared after closing the books at the end of the accounting period.

Purpose of a trial balance

A trial balance will generally help you:

Ensure that the total amount of debits equal the total amount of credits.
Detect and rectify any computational mistakes or errors that were committed during the recording process.

In addition to the above purposes, each type of trial balance also serves a specific purpose. For example, the unadjusted trial balance is used to show the general ledger account balances prior to any adjustments and corrections.

The adjusted trial balance, on the other hand, is used as the basis for the construction of financial statements when using a manual accounting system. For computerized systems, the generation of financial statements can be done automatically without having to use the adjusted trial balance.

Lastly, the post-closing trial balance is used to prove that all temporary accounts have been closed and that only permanent accounts have remaining balances. It also confirms the beginning balances of the ledger accounts at the start of the succeeding reporting period.

Preparing the Trial Balance

The three types of trial balances are prepared almost similarly from each other. This includes copying the ledger account balances at a point in time and then checking for possible errors.

Unadjusted trial balance preparation

The unadjusted trial balance is prepared at the end of the reporting period after all of the transactions during the period have been recorded, and before the financial statements are prepared. However, you may also prepare a trial balance in between recording of transactions if you want to check for any errors that may have been committed during the recording process.

Below are the steps in the preparation of the unadjusted trial balance.

Prepare a blank worksheet with a layout that is the same as the sample trial balance above. Allocate separate columns for the account numbers, account titles, debit balances, and credit balances.
Fill in each column, starting with the account numbers and account titles. You may arrange them according to how they are presented in the chart of accounts and general ledger.
Fill in the debit and credit columns with the respective balances of each account.
Compute the total debit balances by adding all amounts in the debit column. Write the sum total at the bottom of the said column.
Similar to step four above, compute for the sum total of credit balances by adding all amounts in the credit column, then indicate the sum at the bottom of the column.
Compare the total amounts of both debit and credit columns. If you noticed that their amounts don’t equal each other, it may indicate the existence of an error made during the recording process.

Below is an example to help you better understand the preparation process for the unadjusted trial balance.

Let’s assume that your company has already posted all of its transaction during the month of March 2023. Below are each of the accounts and their balances in the general ledger.

Following the steps for the preparation of the trial balance, your company’s unadjusted trial balance should appear as follows.

Adjusted trial balance preparation

To continue with our example above, let’s assume that the following adjustments should be made on specific ledger accounts at the end of March 2023:

Estimated uncollectible amount from your customers is $200.
Unpaid salaries at the end of the month amounted to $1,500.
An inventory of office supplies revealed that $500 are still on hand.
Depreciation during the period for equipment and vehicles are $460 and $560 respectively.
Accrued utilities payable amounted to $2,360.

The following steps can be followed for the preparation of the adjusted trial balance:

In the worksheet that you used to prepare the unadjusted trial balance, you need to add more columns to the right for the adjusting entries and the adjusted trial balance. Under these new columns, create sub-columns to accommodate the debit and credit balances.
Fill in the adjusting entries column with the above adjustments. Make sure that the amounts are placed in the fields pertaining to the related ledger accounts. If an account does not exist yet in the general ledger or is not included in the unadjusted trial balance due to having zero balance, you may add the account name and number at the bottom if needed for adjusting entries.
Bring forward to the adjusted trial balance column the combined ledger account balances of the unadjusted trial balance and the adjusting entries columns.
Compute for the total debit and credit balances in the adjusted trial balance column to ensure that total debits and total credits are equal.

After populating the adjustments and computing for the adjusted ledger balances, your worksheet and adjusted trial balance should appear as follows:

Post-closing trial balance preparation

The post-closing trial balance is prepared after you’ve generated the financial statements and after the closing entries are journalized and posted. The format is the same as the other trial balances, containing columns for the account numbers, account titles, debit balances, and credit balances.

The steps to prepare the post-closing trial balance is the same as that of the unadjusted trial balance. Continuing with the example above, the post-closing trial balance is presented as follows:

Notice that this trial balance only lists the permanent accounts in the balance sheet and does not contain the nominal or temporary accounts that are found in the income statement. The reason for this is that all of the income statement accounts have already been closed to the capital account for the period after the closing entries were posted in the general ledger. In addition to the income statement accounts, the drawing account is also closed to the capital account.

In all three types of trial balances we have prepared above, observe that their total debits and total credits have equal amounts. While this equilibrium may appear favorable, it doesn’t guarantee that there are no errors committed when the transactions were recorded.

Checking For Errors Using the Trial Balance

The main objective of the trial balance, especially when you’re using a manual accounting system, is to help you check if the total debits are equal to the total credits. Using a computerized accounting system helps prevent many errors that are related to unbalanced debits and credits since the software doesn’t allow recording of journal entries that are not balanced.

Errors may exist whether the trial balance contains equal or unequal total debits and total credits. We can categorize each of the possible errors under these two scenarios:

Errors when total debit is NOT EQUAL to total credit
Errors when total debit is EQUAL to total credit

Errors when total debit is NOT EQUAL to total credit

Below are some of the possible errors that may have been committed when the total debit is not equal to the total credit in the trial balance:

Computational Errors
Transposition and Slide Error
Opposite Side Posting Error
Omitted Posting of an Entry

Computational Errors

When the total debit and total credit of your trial balance is not balanced, the first thing you must check is if you’ve added all of the amounts in each column correctly. The unbalanced debit and credit columns may have been caused by something as simple as a computational error made while adding the amounts for each column.

Another possible computational error may happen as you compute for the total debit and credit columns of the ledger account level itself. This results in an inaccurate account balance that will be brought forward to the trial balance and cause the latter to be unbalanced.

To solve this, just re-add each of the columns in the trial balance or individual ledger accounts carefully to determine the correct total amounts.

Transposition and Slide Error

Transposition happens when you have mistakenly interchanged the digits as you entered an amount. For example, $4,756 was entered as $7,456.

A slide error, on the other hand, happens when a decimal point was misplaced in a different position, distorting the correct amount. For example, $1,000 was entered as $10.00.

Transposition and slide error can be usually identified when the difference in the amount is divisible by 9. In the example above, the difference between $7,456 and $4,756 is $2,700 which is an amount that can be divided by 9. Likewise, the difference between $1,000 and $10.00 is $990 which can also be divided by 9.

To determine the correct amount, work backwards to each transaction that was journalized and posted during the period to identify the one related to the error that was committed. This process could be time-consuming and may require a lot of effort, but the earlier this error is identified, the better.

Opposite Side Posting Error

This happens when you have mistakenly copied a debit balance of an account to the credit side of the trial balance. This may also happen at the individual account level when you’ve posted a debit entry to the credit side of the account in the general ledger.

One way to identify this type of mistake is by looking at the difference between the total debits and total credits. If the difference is twice the amount of a particular transaction, then it is indicative of a wrong side recording.

Omitted Posting of an Entry

Posting a journal entry requires accurately copying the details of the entry to the general ledger. However, there’s a possibility that you may have overlooked a debit entry or a credit entry and failed to post that side of the journal entry to the general ledger.

This error may be identified when the difference between the debit and credit columns is equal to the amount of a particular transaction.

For example, let’s assume that you posted only the debit side of the entry below:

Since you failed to post the credit side of the entry, i.e. the accounts payable of $500, the trial balance may show a total credit amount that is $500 less than the total debits. In this case, you may create a filter that only displays transactions whose amounts are equal to $500 to easily narrow down and identify the entry that needs to be posted correctly.

Errors when total debit is EQUAL to total credit

The trial balance does not always catch all types of errors since it only helps with the checking of any unbalanced amounts. Even when using an accounting software that prevents the posting of unbalanced journal entries, manual input of data by humans will result to errors that may be left undetected.

Below are some of the possible errors that may have been committed even when the total debit is equal to the total credit in the trial balance:

Transactions Posted Twice
Omitted Transactions
Erroneous Amounts
Posting to Wrong Account

Transactions Posted Twice

Sometimes, a transaction may be journalized or posted twice. If left undetected, the issue may resolve itself if, for example, a customer questions a billing which they think they have already paid or a supplier informed you that you have paid the full amount of a billing twice.

However, to prevent this error, proper reconciliation between subsidiary accounts and the general ledger control accounts should always be made. It is also important to mark the documents of a recorded transaction as posted so as not to repeat the recording of the same transaction.

Omitted Transactions

Considering the volume of transactions that needs to be recorded, it is also possible that some transactions may unintentionally be omitted. The trial balance cannot detect these transactions that were not recorded in the journal or the ledger in the first place.

To avoid this mistake, your bookkeeping documents should be properly organized, separating transactions that were already posted from those that are not yet to be recorded. Having a checklist of your common transactions is also helpful in preventing the omission of any transaction.

It’s also possible that a transaction is journalized or recorded in the journal but not posted to the general ledger. The trial balance will be unable to detect this since it is based on the account balances in the general ledger. This can be prevented if proper cross-referencing is implemented.

Erroneous Amounts

A journal entry may have equal debits and credits but incorrect amounts. For example, an equipment that was purchased for $5,000 was recorded as follows:

In this example, both sides of the journal entry is balanced but the amount was erroneously recorded as $50,000 instead of only $5,000. This can be avoided when careful checking is made when recording transactions. It is important that another person verify the correctness of the amounts in the journal entries before posting them to the ledgers.

Posting to Wrong Account

There’s also the possibility of journalizing and posting a transaction to the wrong account. For example, you performed a service to a client for $1,000 and the client promises to pay you after 10 days. You recorded the transaction as follows:

In this journal entry, cash was debited instead of accounts receivable even if cash is not yet received from the client.

Let’s assume another scenario where you correctly journalized this transaction as follows:

But this time, you posted the debit amount to the debit side of the cash account instead of the accounts receivable account in the general ledger. Even though your journal entry is correct, there was still an error since you’ve posted the debit entry to the wrong account in the general ledger.

The errors in both scenarios above can be prevented if proper care and checking is implemented before posting a transaction. If in case these errors were overlooked, it may resolve itself when the customer pays the amount on due date and you discovered that the customer’s account is missing in the accounts receivable subsidiary ledger.

You can also detect an erroneous account posting when you notice in the trial balance that there is an unusual amount in an account that previously has no balance. You may also notice that an account that usually has a consistent balance suddenly has a noticeable change on its amount when you compared the trial balance to the trial balance from a previous period.

Correcting and Preventing Errors

Before preparing the financial statements, it is important to check for any errors that may have been committed during the recording process. Not being able to identify any errors will lead to inaccurate financial statements that could eventually cause a lot of frustrations and unnecessary efforts when you need to trace the errors back to the journals and ledgers.

Once you’ve identified the transactions related to any errors that we have discussed above, you’re next step is to create a correcting entry to rectify them. As the name suggests, correcting entries are journal entries that fix any errors that are related to a posted transaction in the general ledger.

Preventing the occurrence of errors may require a bit more effort but it will guarantee that the information in your accounting books are accurate. Below is a summary list of the basic things that you can do to prevent an error from happening:

Ensure that all transactions for the accounting period were accurately journalized and posted.
Check that the balances of the subsidiary ledgers and control accounts in the general ledger match each other.
Carefully transfer the balances of the ledger accounts from the general ledger to the trial balance, making sure that the copied information are correct.
Ensure that all column totals in the general ledger and trial balance were added correctly.
Have someone check the journal entries before posting to the ledgers. Observing proper separation of duties between the person recording and the person verifying is an important internal control to avoid the possibility of errors and fraud.

You may have already realized that most of the errors above can be avoided by using a computerized accounting system. This is true for errors that cause unequal debits and credits in the trial balance since an accounting software will prevent you from posting unbalanced journal entries.

But if you’re still sticking to a manual accounting system, the trial balance can serve as a useful starting point in identifying any errors that may have been committed during the recording process. Whichever system you’re using, it’s important to exercise proper care and caution when recording transactions.

Review Questions

What are the differences between the unadjusted trial balance, adjusted trial balance and post-closing trial balance?
What are some examples of errors that result to unequal debits and credits in the trial balance?
What are some of the steps you should take to prevent an error in recording to happen?
What are the two general purpose of a trial balance?
Can the trial balance detect all possible errors that could be made during the recording process?