Trial Balance Example

Trial Balance Example

Understand a pivotal point in the accounting cycle through this tutorial on trial balance with a comprehensive trial balance example. Why is the trial balance so important? It’s important because it tells you if the general ledger’s debit and credit balances are in sync. If they are not, corrections and adjustments would have to be made before financial statements are prepared and the books are closed for the period.
What is a Trial Balance and where does it fit in?

The trial balance is a very important step within the accounting cycle. The entire process for the cycle begins when the books are open for the period and every business transaction (with a financial impact) that occurs is journalized and then posted to the general ledger. Towards the end of the period (a period can be a month, quarter or year for example), a worksheet is put together listing all the accounts in the ledger and their balances in order to verify the accuracy of the ledger. This is what is known as the trial balance. See diagram below for a look at the entire accounting cycle and where the trial balance fits in.

Trial Balance Example Diagram 1 - Where The Trial Balance Fits In

Trial Balance Example Diagram 1 – Where The Trial Balance Fits In

What is the purpose of a Trial Balance?

The purpose of a trial balance is to verify and ensure the accuracy of the general ledger. The ledger contains debit and credit balances from journal entries that are made throughout an accounting period. There are multiple steps involved to ensure the accuracy of the ledger and they will be discussed step by step. Note that just because you have equal debit and credit balances doesn’t mean the ledger is error free. That’s why it’s really important to make sure that every journal entry that occurs within the period is vetted for accuracy before it’s posted.

Mistakes do happen from time to time and it usually is reflected in the trial balance. Later in this tutorial, limitations of the trial balance will also be discussed with a couple of  tactics you can use to discover any errors when the debit and credit balances don’t equal each other.

Step 1 – Trial Balance Example – Understand Debits, Credits, Normal Balances & Journal Entries

The first step in our trial balance example involves understanding what debit and credits are and the concept of normal balances. In double-entry accounting, every transaction has two sides to it in that it will affect at least one debit account and at least one credit account. A thorough discussion of credits and debits along with normal balances are discussed in this tutorial on Tabular Analysis (which is another way to ensure accuracy of the ledger). Read that first if you need to understand the aforementioned concepts.

Once you know the basics of journal entries and the general makeup of ledger accounts, it is very easy to understand why there is a need for a trial balance. If the reasons aren’t clear, know that the goal is preserve the integrity of vital information that will eventually play a part in the business decision making process. Since it’s never any business manager’s vision to see a business fail, the quality of factual information pertaining to the business must be pristine. The trial balance exercise is one way to accomplish that. Assuming you are comfortable with what has been said so far, proceed to the next step.

Step 2 – Trial Balance Example –  Background Information

We need a business scenario, so let’s say for a moment that you are the owner of a consulting company that was recently started.  As a business owner, you’ve witnessed several important business transactions take place throughout the prior month. You hired a bookkeeper from a temp agency to handle the books and he just handed you the financial statements for the period that just ended. The numbers in the financial statements look better than you expected and you’re happy about that. However, you are a little wary and want to make sure that the information in the financial statements are indeed accurate.

You keep a copy of the invoices and other important documents that you give your bookkeeper, so you begin there. In looking through your files, you make a list of everything that had a financial impact to the business –  and here is the list you come up with:

Trial Balance Example – Business Transactions
June 01 Made a deposit to a business bank account for the amount of $50,000.
June 03 Bought office supplies and equipment on account for $1,450
June 06 Billed a client $2,800 for services
June 11 Received payment for previous billing of $2,800 for services rendered.
June 14 Paid rent expenses of $1,400
June 15 Paid $3,604 in salaries
June 18 Paid $1,450 to vendor for the supplies and equipment bought on account
June 20 Billed a client $ 12,000 for consulting services
June 21 Paid $589 for travel, lodging and entertainment expenses.
June 24 Determined that the value of supplies you have left amounts to $997 (cost of supplies used was $453).
June 25 Withdrew $350 from the business account for personal use
June 27 Billed a client $19,500 for consulting services
June 30 Received $12,000 for June 20th billing
June 30 Paid salaries of $3,604
Step 3 – Trial Balance Example  - Journal Entries
With the list above in hand, you create your own separate journal entries to verify entries in the journal made by your bookkeeper. Here are the  journal entries you come up with:
June 01 Business Transaction Debit Credit
Cash $50,000
Owner’s Capital $50,000
June 03 Business Transaction Debit Credit
Supplies $1,450
Accounts Payable $1,450
June 06 Business Transaction Debit Credit
Accounts Receivable $2,800
Revenue (Fees) $2,800
June 11 Business Transaction Debit Credit
Cash $2,800
Accounts Receivable $2,800
June 14 Business Transaction Debit Credit
Rent Expenses $1,400
Cash $1,400
June 15 Business Transaction Debit Credit
Salaries Expense $3,604
Cash $3,604
June 18 Business Transaction Debit Credit
Accounts Payable $1,450
Cash $1,450
June 20 Business Transaction Debit Credit
Accounts Receivable $12,000
Revenue (Fees) $12,000
June 21 Business Transaction Debit Credit
T&E Expenses $589
Cash $589
June 24 Business Transaction Debit Credit
Supplies Expense $453
Supplies $453
June 25 Business Transaction Debit Credit
Owner’s Capital $350
Cash $350
June 27 Business Transaction Debit Credit
Accounts Receivable $19,500
Revenue (Fees) $19,500
June 30 Business Transaction Debit Credit
Cash $12,000
Accounts Receivable $12,000
June 30 Business Transaction Debit Credit
Salaries Expense $3,604
Cash $3,604

Step 4 – Trial Balance Example –  The General Ledger

Having done the journal entries, your decide the next step is to organize the entries in a way it can be useful to summarize, so you create T-Accounts on a  worksheet mimicking the general ledger. And here is what you come up with:
Trial Balance Example : The General Ledger T-Accounts

Trial Balance Example : The General Ledger T-Accounts

 

Step 5 – Trial Balance Example – Create the Trial Balance based on Account Balances from the Ledger

Now it’s easy for you to summarize the ledger balances and see if the totals add up. If they do, then you know that the financial statements your bookkeeper provided you were good. You create a trial balance worksheet and this is what you end up with:

Your Consulting Company
Trial Balance – June
Ledger Account Debit Credit
Cash 53,803
Accounts Receivable 19,500
Supplies 997
Accounts Payable 0
Owner’s Capital 49,650
Revenues 34,300
Rent Expense 1,400
Salaries Expense 7,208
Travel and Entertainment Expense 589
Supplies Expense 453
Total 83,950 83,950

Having seen that the trial balance you prepared balances and it also matches what your bookkeeper put in, you are content.

This topic is not difficult to grasp, practice on your own with another trial balance example or two and become more comfortable with the accounting cycle.

Important Additional Notes to Above Trial Balance Example:

While the trial balance example presented above showed you the basics, in practice things are usually a bit more complicated. It won’t be  complicated in terms of principle, but the volume of data you deal with may be significantly higher. In such situations, the possibility of erroneous journal entries are more than likely and in many cases it will be reflected in the trial balance. There are, however, limitations. Certain things that a trial balance won’t pick up on:

- Journal entries to wrong accounts with the correct amounts and balances.

- Missing journal entries all together

- Double posting of the same business transaction

- A erroneous entry that is offset ($) by another erroneous entry.

When you do notice that the debit and credit balances don’t sync up, there are a couple of tactics you can use to narrow down the errors.

- If the difference between the debits and credits is an even number (divisible by 2), divide that number by 2 and check for an entry on the balance side that’s higher for that number. For example, if the difference between debits and credits is $1,000 with debit having the higher balance – divide by 2 to get $500 and now check entries on the debit side for $500.

- If the difference between debits and credits divides evenly by the number 9, it’s possible that there’s a transposed entry. For example, assume a journal entry is supposed to be made by debiting cash and crediting  revenue for the amount of $2,981. Now assume that cash was debited for $2,981 but revenue was credited $2,918 – transposing the 8 and 1. In this case, the difference is $63, which is divisible by 9.

If you found the trial balance example presented here useful, please share!

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