Preparing a trial balance is the first step in interpreting your business financial results. The trial balance is also a summary of the ending balances of the entire list of accounts in your General Ledger. It should be prepared at the end of accounting period, perhaps the end of a year, quarter or month.
Steps to prepare the trial balance
Follow these steps to prepare the trial balance for your business.
- Prepare a worksheet with three columns: one column for account names, another column for the debit amount, and last column for credit amounts.
- Sum up all the credit amounts and debit amounts separately for each ledger accounts. These ledger accounts include cash, accounts payable, and more.
- If the amount on the debit side of an account is greater than the credit amount, get the difference and post it in the credit column of the trial balance. Repeat this procedure for every account.
- After you have entered all of the account balances, sum each column of the trial balance. Note that the total of the credit column should be equal to that of the debit column.
It is important to note that a successful trial balance doesn’t imply that there isn’t any error in your books. It simply means that you have entered all the transactions in the trial balance.
Balanced trial balance
If you post all the journal entries correctly in the general ledger, and then transfer the right data from the general ledger to the trial balance, your credit total and debit, grand total should be equal.
However, a trial balance can still balance when the below errors were made:
- Omission of the entire transaction in journal or general ledger
- Failure to transfer a transaction from journal to general ledger or you transferred incorrect data
- You recorded a transaction twice either in the general ledger or the journals
- You posted a transaction in the wrong account
This is why a balanced trial balance doesn’t mean it is error free as mentioned above.
Unbalanced trial balance
Unbalanced trial balance is a clear indication that there is an error somewhere in the accounting process. Since you will use the information in the trial balance in the preparation of financial statements, you should figure out the error before you continue with your accounting process.
The main cause of this is that the total amount debited is different from the total amount credited in any single accounting entry. This always happen in the old days when the accounting process is not computerized. With the accounting software we now have, it is almost impossible to post an “unbalanced” entry that results in this error.
Lastly, preparing a trial balance frequently means that you will have a few transactions to go through and in case you make any error, it can be traced easily. Note that the very first step every accounting firm in Singapore takes when providing bookkeeping service is to prepare a trial balance. Therefore, if you are not sure of how to prepare it, contact us for help. Otherwise, you will mess your entire accounting process.