After posting all financial transactions to the accounting journals and summarizing them in the general ledger. a trial balance is prepared to verify that the debits equal the credits on the chart of accounts. The trial balance is the next step in the accounting cycle. It is actually the first step in the "end of the accounting period" process.
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List every open ledger account on your chart of accounts by account number. The account number should be the four digit number assigned to the account when you set up the chart of accounts. List your total debits and credits from each general ledger account. You should have a table with four columns. The columns should be the account number, account name, debit, and credit.
For each open ledger account, total your debits and credits for the accounting period for which you are running the trial balance. Record the totals for each account in the appropriate column. If the debits and credits do not equal, then there is an error in the general ledger accounts. Running a trial balance on a regular basis, at least monthly, helps you identify any problems quickly and easily and fix them as soon as they arise. Preparing the trial balance should be tied to the billing cycle of the company.
Do not prepare any adjusting entries yet. The trial balance is prepared before you make any adjusting entries. The initial trial balance is prepared to detect any mathematical errors before you make adjusting entries or start closing your books for the accounting period.
If you find you have an unbalanced trial balance, in other words the debits don't equal the credits, then you have an error in the accounting process. That error has to be found and corrected.
The first step in finding an error is to simply add the credit and debit columns again to check your math. If they still
don't add up, then subtract the smaller column from the larger and look for the missing amount in the smaller column. If you find it, you've found your error.
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There are other standard techniques to track down an error in a trial balance. If the debits and credits do not equal, see if the number 2 divides equally into the difference. If it does, look for an account, look for an account incorrectly in the column with the larger total that equals half the difference. If you find this, you've found your error.
Another technique is to use the number 9 to find a transposition error. If the number 9 divides evenly into the difference between the credits and debits, you have a transposition error. Go back over your credit and debit entries to try to find your transposition error.
Examples of other errors that could unbalance a trial balance are:
- Not including a ledger account in the trial balance calculation
- Making an error in a compound journal entry
- Putting the wrong ledger accounts in the trial balance columns
- Miscalculating the ledger account amounts
- Posting an accounting journal entry to the wrong general ledger account
If you fail to make a journal entry, it will not show up as an error in the trial balance.
If you record a financial transaction in an incorrect account, it will not show up as an error in the trial balance.
If you transpose the number in the debit column with the number in the credit column, it will not show up in the trial balance.
Failing to post an accounting journal entry to the journal ledger will not show up in the trial balance.
What You Need:
- Your business computer and accounting program
- Your source documents