The Trial Balance...LET'S DO THIS!
A trial balance is the process where all credit and debits of a business are compiled in order to judge the financial standing of a business.
- What is a Trial Balance?
- Why is a Trial Balance so Important?
- Who Should Prepare a Trial Balance?
- How to prepare a Trial Balance?
- Which Errors are Revealed by a Trial Balance?
- How do I know if my Trial Balance is Correct?
1. What is a Trial Balance?
So, you have been running your business, facing all the highs and lows, challenges, and obstacles the business world has to throw at you. You have done everything to keep your head above water, but now it's time to truly understand where you are financially. Whether you have financial documents to prepare, have a surplus or deficit of cash or simply want to know how your business is doing, now is the time for a trial balance to be prepared.
A trial balance is a bookkeeping process where the balances of all ledgers are compiled into credit and debit columns to determine an overall balance. In essence, a trial balance is created to ensure that each and every recorded transaction of a business is mathematically correct. They are prepared periodically by most businesses and are used in preparing the final accounts.
2. Why is a Trial Balance so Important?
Considering the trial balance is a recording of all the financial transactions of a business, the accuracy of the worksheet is of utmost importance. Some of the reasons include:
Checking Arithmetical Accuracy
The trial balance is created to confirm the actual figures entered on the right side of the current account after transferring the amounts from various ledger books.
Assist in Preparing Financial Statements
Profit and Loss Account, Balance Sheet, and Cash Flow Statement must be prepared at the end of each accounting year. These balances are now already available within the trial balance, which makes the preparation and analysis of future financial statements easier and quicker to do.
Finding and Rectifying errors
In essence, both the debit and credit columns of a trial balance must match. Assuming that the information is accurate if the columns do not balance, then the accountant or business owner must review all the business transactions to rectify the error.
Comparative Analysis with previous years
The preparation of a Trial Balance helps to compare balances of the current year with the balances of previous years. This helps the business to make important decisions regarding income, expenses, production costs, etc. It helps to recognize the trend in the business and take action wherever necessary.
Creation of Audit Reports
When an audit is conducted, whether internal or external, the entirety of a business’s financial health and all financial transactions are open to being speculated over. Having a well-prepared and accurate trial balance aids the audit trail for allows for better analysis by the auditors in the creation of their report.
Considering the information and results of a trial balance, any decision regarding the future of a business, mainly due to budgeting can be highly influenced.
3. Who Should Prepare a Trial Balance?
Each and every business owner or accountant/bookkeeper working for or on behalf of a company! It's that simple. With the importance listed above, it is imperative for all businesses to create a trial balance.
On a personal level, although not as important, it can be seen as good practise for any individual to create a trial balance for their personal finances. After creating such a document, it can produce surprising results with regards to where you are spending your money and allow you to better forecast on where you can save money by cutting down less important expenditures.
4. How to prepare a Trial Balance?
A trial balance can be prepared manually or generated by the accounting software you may be using. The process entails listing all your accounts with a debit and credit column, then totalling up each side to see where your business is financially. Whilst the preparation may seem simplistic, serious diligence must be paid to the information inputted on the worksheet as the results are of serious importance.
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The basic steps to preparing your trial balance worksheet:
- Prepare a worksheet with three columns. One column is with account names, another is for debits, and the other is for credits.
- Fill in the names of all your accounts and input their balances in the appropriate debit or credit columns.
- Total up the debit and credit columns.
- Compare the column totals.
In a perfect world, for the trial balance to be a success, both the debit and credit columns should amount to the same figure or balance. When both sides do not balance, you must ensure first that all the information is correct before actioning a decision regarding the results.
5. Which Errors are Revealed by a Trial Balance?
Considering the process of creating and confirming the result of a trial balance, the errors revealed are usually down to incorrect information being inputted, which in turn creates a knock along effect of an imbalance of the trial balance, some of which are:
- Inputting the wrong amount
- Inputting to the wrong side of the balance sheet
- Incorrect totalling of the books
- Posting a cost twice
- Errors to the list of debtors or creditors
- Omission of an account
- Errors in carrying totals from one page to another
- Incomplete entries of information
While some of these mistakes may seem arbitrary, they can lead to major discrepancies on the books of a business, and in the worst-case scenario can lead to fines or poor reputation if payments are missed due to these mistakes.
6. How do I know if my Trial Balance is Correct?
The idea of a trial balance is that both sides of the ledger should add up, put simply if they do not add up then there is a problem that will need to be found. The process of determining where the problem lies is a case of a careful review of the trial balance which can be done as so:
- Check that all ledger accounts balance one by one.
- Both columns (Debit and Credit) should be checked.
- If any difference, divide the same by 2 and see whether the said figure appears on the correct side or not.
- With the addition of all subsidiary books, all ledger accounts to be checked
- Posting from subsidiary books to the ledger to be verified and confirmed
Throughout this article, we have highlighted how to create a trial balance and the importance of a trial balance. Although this may seem to some as a task that can be done without an expert's advice, there are problems that can always arise.
Common among the many issues is human error. Even the smallest of initial mistakes can end up having a detrimental effect on the results of your trial balance.
Along with human error is the time spent on such an important task, which is probably the main reason which leads to human error in the first place! By taking a DIY approach, business owners will also miss out on the expertise and experience which can be gained from hiring qualified personnel.
In order to save time, money and avoid any issues which could arise, find an expert in the field on Welink Accountants where you can be matched with an expert in a few clicks and you, and your business can start to benefit from the experience of one of the many qualified accountants and bookkeepers available on the website.