Everything You Need To Know About Trial Balance
Double-entry accounting requires the sum of debit balances to equal the sum of credit balances
. A trial balance is a list of all accounts and balances in a certain period of time. Account balances should be recorded in the appropriate credit and debit portions of the trial balance.
Preparing A Trial Balance
There are three important steps to preparing a trial balance. First, you have to list each account title and the amount, from the ledger, in the trial balance. If an account has a zero balance just list it with a zero in the balance column or you can omit it completely. Second, compute the total debit balances and the total credit balances. Lastly, verify that the debit balances are equal to the credit balances.
Errors
Sometimes the trial balance might not turn out to be equal due to errors. In this instance the errors must be found immediately and corrected. The most efficient way to find errors is to check the journalizing, posting, and trial balance preparation in reverse order. Here are some steps you can follow to easily find your mistakes.
1. Verify that the trial balance columns are correctly added.
2. Verify that account balances are accurately entered from the ledger.
3. Check to see if a debit or credit balance was mistakenly listed in the trial balance as a debit or credit. A clue to this error is when the difference between total debit and credits equals twice the amount of incorrect account balance.
4. If error is still not corrected or noticeable then you should recompute each account balance in the ledger.
5. Verify that each journal entry is properly posted.
6. Verify that the original journal entry has equal debit and credits
After following all the above steps the error should be uncovered and properly entered to make the trial balance equal. If an error in a journal entry is discovered before the error is posted, it can be corrected by drawing a straight line through the incorrect amount. The correct information is then written above the the incorrect information to create a record of change. If an error in a journal entry is not discovered until after it is posted, we correct it by creating a correction entry that removes the amount from the wrong account and records it to the correct account. Example, suppose $200 purchase of supplies is journalized with an incorrect debit to Equipment, and then the entry is posted into the ledger. The supplies ledger account balance is understated by $200, and the Equipment ledger account balance is overstated by $200. The correcting entry would be:
Supplies (debit) 200
Equipment (credit) 200
Adjusted and Unadjusted Trial Balance
An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded. An adjusted trial balance is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger. The order of accounts in the trial balance is usually set up to match the order in the chart of accounts and several new accounts form from the adjusting entries. Each amount in the Adjusted Trial Balance columns is computed by taking that account's amount from the Unadjusted Trial Balance columns and adding or subtracting any adjustment.
Preparing Financial Statements
We can prepare financial statements directly from information in the adjusted trial balance. An adjusted trial balance includes all accounts and balances appearing in financial statements, and is easier to work from than the entire ledger when preparing financial statements. Revenue and expenses balances are transferred from the adjusted trial balance to the income statement. Amounts for net income, retained earnings, and dividends are then used to prepare the statement of retained earnings. Asset, liabilities, and common stock balances on the adjusted trial balance are then transferred to the balance sheet.
Everything You Need To Know About Trial Balance
By: Brittany
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