Trial balances provide an essential snapshot of the differences between debits and credits in your business ledgers, offering essential data for account reconciliation and financial statement preparation. But beyond detecting accounting accuracy, the trial balance is foundational for robust business decision making, enabling better financial planning, effective tax preparation and thorough audit preparation.
What Is a Trial Balance?
A trial balance is a list of all accounts in a company ledger with their balances. Its data comes from ledgers, but it differs in that it only shows account totals, while general ledgers list individual transactions.
It’s called a “trial” balance, because it allows bookkeepers to test the mathematical accuracy of account information before preparing balance sheets and other financial statements. It may be prepared more frequently than formal financial statements—typically once a month.
A trial balance includes a list of all the accounts in a ledger with their numbers, descriptions and debit or credit totals. Following the chart of accounts principles, the trial balance lists:
- Assets
- Liabilities
- Equities
- Dividends
- Revenue
- Expenses
Like ledgers, trial balances list assets in order of liquidity.
These reports show current account balances. This can reveal mathematical errors. However, it will not show other types of errors, such as errors of omission, errors of commission, errors of principle or certain bank reconciliation errors.
The Primary Purpose of a Trial Balance
Trial balances primarily serve to confirm bookkeeping accuracy by exposing mathematical errors before they can be introduced into financial statements. In addition to error detection, these reports serve several other important uses:
- Summarizing data needed to prepare financial statements and form a link between ledger data and final accounts.
- Supporting strategic planning by providing real-time insight into financial performance.
- Assisting tax and audit preparation.
Types of Trial Balances: Unadjusted, Adjusted & Post-Closing
Trial balances may be unadjusted, adjusted or post-closing. Each type has a distinct purpose and is created at a different stage in the accounting cycle. All three types play a role in a complete accounting process.
Unadjusted
Unadjusted trial balances list all ending balances of accounts from general ledgers prior to any adjusting entries. They provide a preliminary check on ledger balances to determine if any mathematical errors need to be corrected. Unadjusted trial balance reports are created after journal entries have been posted to the general ledger.
| Account | Debit (USD) | Credit (USD) |
| Cash | 15,000 | |
| Accounts Receivable | 5,000 | |
| Office Supplies | 2,000 | |
| Equipment | 20,000 | |
| Accounts Payable | 3,000 | |
| Unearned Revenue | 4,000 | |
| Notes Payable | 10,000 | |
| Capital Stock | 25,000 | |
| Total | 42,000 | 42,000 |
Adjusted
An adjusted trial balance is a listing of all accounts and their balances after adjusting entries have been made to the unadjusted trial balance. These adjusting entries are necessary to update the accounts for items that are not captured in daily transactions, such as accrued expenses, accrued revenue, deferred revenue, prepaid expenses and depreciation.
By incorporating these adjustments, the adjusted trial balance provides a more accurate picture of the company’s financial position at the end of the accounting period, ensuring that the financial statements are prepared using the most current and complete information.
| Account | Debit (USD) | Credit (USD) |
| Cash | 15,000 | |
| Accounts Receivable | 5,500 | |
| Office Supplies | 1,500 | |
| Equipment | 20,000 | |
| Accumulated Depreciation | 1,000 | |
| Accounts Payable | 3,000 | |
| Unearned Revenue | 3,500 | |
| Notes Payable | 10,000 | |
| Interest Payable | 500 | |
| Capital Stock | 25,000 | |
| Service Revenue | 8,000 | |
| Supplies Expense | 500 | |
| Depreciation Expense | 1,000 | |
| Interest Expense | 500 | |
| Total | 43,500 | 43,500 |
The adjusted trial balance includes the accounts after adjusting entries have been made. In this example, adjustments were made for items like unearned revenue and depreciation. The report also ensures that the total debits and credits remain equal after the adjustments.
Post-closing
A post-closing trial balance is a listing of all balance sheet accounts and their balances after the closing entries have been made at the end of an accounting cycle. Its purpose is to verify that all temporary accounts have been properly closed and their balances transferred to retained earnings, ensuring that only permanent accounts are carried forward into the new accounting cycle. If any temporary accounts appear on the post-closing trial balance with a non-zero balance, it indicates an error in the closing process.
By providing a clean starting point for the new accounting cycle, the post-closing document serves as a final accuracy check before recording transactions in the new period.
| Account | Debit (USD) | Credit (USD) |
| Cash | 15,000 | |
| Accounts Receivable | 5,500 | |
| Office Supplies | 1,500 | |
| Equipment | 20,000 | |
| Accumulated Depreciation | 1,000 | |
| Accounts Payable | 3,000 | |
| Unearned Revenue | 3,500 | |
| Notes Payable | 10,000 | |
| Interest Payable | 500 | |
| Capital Stock | 25,000 | |
| Retained Earnings | 8,000 | |
| Total | 42,000 | 42,000 |
The post-closing trial balance contains only balance sheet accounts, as all temporary accounts (revenue, expenses, and dividends) have been closed to the retained earnings account. The purpose of this type of report is to verify that the debits and credits are equal after the closing process and that the company is ready to begin the next accounting period.
Trial Balance vs. Balance Sheet: How Are They Different?
While trial balances and balance sheets both provide balances, they have different audiences, formats, purposes and uses:
| Trial Balance | Balance Sheet |
| Distributed for internal use | Distributed to external stakeholders |
| Lists account balances | Lists specific assets, liabilities and equity |
| Identifies mathematical errors and provides a basis for generating financial statements | Summarizes a company’s financial condition at any given point in time |
| Used to correct bookkeeping errors and evaluate accuracy | Used to help managers and stakeholders evaluate overall performance |
Despite their differences, these statements have a close relationship. Trial balances help ensure the accuracy of data that appears on balance sheets. Balance sheets summarize the highlights of data provided on trial balances.
How Businesses Can Use the Trial Balance to Guide Business Decisions
Thought this statement is typically used to assess bookkeeping accuracy, taking a closer look can provide additional insights to help you improve areas of your business.
Analyzing Financial Performance & Costs
Trial balances help companies evaluate financial performance by providing preliminary data on account balances before financial statements are finalized. This information can be used to compare account balances to previous periods, enabling financial analysts to identify trends and opportunities for investment or improvement. For example, trial balances indicating strong cash assets may suggest opportunities to invest in new projects, while balances showing excessive expenses may suggest candidates for cost-cutting. These statements can be especially useful for these purposes, because they represent current data on assets and liabilities, enabling companies to seize immediate opportunities.
Reporting Compliance & Anomaly Detection
Trial balances are crucial accounting tools that help companies meet their financial reporting and compliance obligations. By ensuring that total debits equal total credits, they demonstrate compliance with the fundamental principle of double-entry bookkeeping and maintain the integrity of financial records. They also provide a reliable foundation for preparing accurate financial statements, such as the balance sheet, income statement, and cash flow statement, which are essential for meeting regulatory and tax compliance requirements.
Your trial balance can also play a vital role in evaluating the effectiveness of your internal controls. Regular review of trial balances allows management to identify unusual fluctuations, discrepancies or anomalies that may indicate errors, omissions or fraudulent activities. Consistent monitoring of your statements can help you strengthen your internal controls and reduce the likelihood of financial misstatements or fraud.
Ensure Accurate Financials with Expert Accounting Services
As a small business, you can improve your financial planning and performance by increasing the accuracy of your financial statements, empowering you to make better business decisions.
The best way to ensure the accuracy of your statements is to work with experienced accounting experts familiar with trial balancing best practices and the latest accounting technology. Paro uses a proprietary AI-powered platform to efficiently and effortlessly match you with remote, on-demand accountants and CPAs. Access to our network of certified experts makes it easy for you to bypass expensive recruitment searches and find the talent you need at a price that meets your budget. Enlist our outsourced accounting services to improve your financial planning and ensure that your trial balances show profitable performance.
