While most business owners and professional accountants are familiar with terms like gross revenue and net profit, a lesser-known term is “trial balance.” So, what exactly is trial balance and how to you calculate it? To learn more about trial balance in accounting, keep reading.
Trial Balance: The Basics
A trial balance is essentially a list of all general ledger accounts, including revenue and capital accounts. It contains the names of all nominal ledger accounts and their respective balances.
As you may already know, every account in the nominal ledger features either a debit or credit balance. A trial balance contains two separate columns, one for the credit balances and another for the debit balances. All credit balance values are listed in the debit column, while the credit values are listed in the credit column.
Purpose of Trial Balance
Businesses use trial balances to show that the value of their debit balances is equal to the total of their credit balances. When creating a trial balance, the business owner or accountant must check to make sure the debit column is equal to the value of the credit column. If the debit column does equal this amount, there’s an error somewhere in the nominal ledger accounts, which the business owner or accountant must identify before he or she can make a profit and loss statement.
Trial balances also allow for the creation of other financial reports. Because they contain every debit recorded by the respective business, trial balances can be used for a wide variety of reports. Furthermore, they help business owners and accountants identify errors, which of course is essential in small business accounting.
How to Create a Trial Balance Report
While it may sound confusing, creating a trial balance report is actually a relatively easy and straightforward process.
A typical trial balance report contains a column for all debits and another column for all credits. There’s also a third column in which the name of these accounts are listed. A row for “sales” may reveal a $10,000 credit listed in the credit column, while a row for office renovations may have a $4,000 expense listed in the debit column. Business should create trial balance reports by including all relevant credit and debit accounts. Each debit should feature a corresponding credit entry. After completing the trial balance report, you can add the two columns up to check and see if they are equal.
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