Trial balance: what is it, how to prepare it, and its importance in accounts?

Trial balance what is it how to prepare it and its

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In accounting systems, there are many possibilities that can lead to making mistakes. For example, a novice accountant faces difficulty with the task of bookkeeping and may find it difficult to understand and implement the complex double-entry system. Even a professional accountant is not exempt from time pressures and may click the enter button incorrectly or mistakenly deduct a certain amount from the credit account instead of the debit account. Here comes the role of the trial balance, and for those who do not know, it is a tool used by accountants to verify the validity of the general ledger accounts and to reduce errors that may appear in the company’s financial reports. These internal financial reports help in verifying the validity of the double-entry accounting system and help in discovering errors before issuing any significant external financial statements.

What is the trial balance?

It is an essential tool used in the accounting bookkeeping process to verify the accuracy of a company’s financial records. The balance sheet is a comprehensive summary of all accounts in the company’s ledger and includes:

  • Asset accounts.
  • Liabilities
  • owner’s equity

The balance is created by listing all accounts and their balances in two columns, with debit balances in the first column and credit balances in the second column. The total debit balances should equal the total credit balances if the accounts are entered and balanced correctly.

If the trial balance does not balance, this indicates that there is an error in the general ledger records. The error could be the result of incorrect entries in the journal, such as incorrect recordings of transactions or overruns in account recordings.

What is an adjusted trial balance?

It is a financial statement that reflects the general ledger accounts and their balances after adjusting the entries at the end of the accounting period. Adjustment entries are made to ensure the accuracy of the financial statements and their representation of the financial position and financial performance of the company during the accounting period. Adjustment entries include several main points, which include:

Accrued adjustments

It is the recognition of revenues or expenses that occurred in the accounting period but have not yet been recorded in the accounts. For example, if the company provides a service to a customer and has not yet invoiced, the entries must be adjusted to record this accrued revenue.

Advance payment adjustments

It is the recognition of revenues or expenses that have been collected or paid in advance but not yet written or incurred. For example, if the company provides a service to a customer and an advance amount is paid before the service is provided, then this amount must be recognized as deferred revenue until the service is provided and earned.

Depreciation adjustments

It is the recognition of the depreciation of fixed assets over their useful lives. For example, if the company owns equipment used in daily operations, the depreciation costs for this equipment must be recorded at an amount that reflects the deterioration in its value over time.

Amortization

It is the recognition of a gradual reduction in the value of intangible assets over their useful lives. For example, if a company has land use rights or patents used in its operations, the costs of depreciation of these assets must be recorded over time.

After making adjustments to entries, the adjusted trial balance is used to verify the balance of total debts and credits. It is of great importance as it ensures an accurate representation of the financial position and financial performance of the company during the accounting period; in other words, it helps to create accurate financial reports that reflect assets, liabilities, revenues, and expenses. Which may not be evident in the general ledger.

Example

Suppose you purchased $1,200 worth of office supplies using a personal credit card. This purchase will increase your credit by $1,200 on the unadjusted balance. However, the adjusted adjustments will correct this error by adding a debit of $1,200 to the expense account. So we should note that these adjustments do not definitively correct errors in the unadjusted balance, but they contribute to creating more accurate financial reports and an accurate representation of the company’s financial position.

Components of the trial balance 

The trial balance includes a number of main sections, each of which contains important information about the facility’s financial accounts. These sections are:

Various accounts

If you are wondering: What accounts appear in the trial balance? It includes accounts receivable and accounts payable, and their presence and nature vary according to the type of facility and the adopted accounting system. Accounts receivable represent the accounts that show the values due for payment by the facility, while accounts payable reflect the values due for collection by the facility.

Expenses

Expenses are accounts receivable in the trial balance. They represent the costs incurred by the establishment in order to operate its business and its financial accounts. This includes expenses such as rent, electricity bills, and employees’ salaries and wages. Therefore, it has a debit balance in the balance.

Revenues

Revenues are accounts payable in the trial balance as they represent the income achieved by the establishment. This includes revenues such as product sales, proceeds from the sale of assets, and revenues from securities. Therefore, it has a credit balance in it.

Assets

Current assets appear on the debit side of the balance when their balance increases, while they appear on the credit side when their balance decreases.

An example of current assets are the Treasury account and the bank account. As for fixed assets, they usually appear on the debit side of the trial balance because they are long-term investments and require direct purchase. In the case of selling fixed assets, they become sale income and appear on the credit side of the balance.

Liabilities

Liabilities appear on the credit side of the balance, as they represent the financial obligations and debts incurred by the enterprise.

What is the importance of trial balance?

The importance lies in the following:

  • Detecting mathematical errors.
  • It is the basis for preparing final accounts.
  • Ensuring matching balances and accuracy of accounts.
  • Summarize calculations.

An example of a trial balance

Credit account name debit
…………….. …………………. ……………..
  Cash 800.000
  Accounts receivable 200.000
  Inventory 320.000
  Prepaid expenses 440.000
240.000 Accounts payable  
360.000 Long-term debt  
800.000 Property rights  
640.000 Sales revenue  
  Cost of goods sold 440.000
  Rent expense 40.000
  Salaries expense 160.000
………………… ………………… …………………
Total: 1400,000   1400.000

How to prepare trial balances

Preparing the trial balance is an important step in the financial audit process, as it is used to verify the validity and accuracy of the company’s financial records. This is done after balancing, posting the accounts with their credit and debit balances, and closing the ledger. The following is an illustrative example of the work of trial balances:

If the ledger account is for some accounts that differ at the end of the period:

Treasury
220,000 equipment

120,000 purchases

80,000 purchases

136.000,000 bank

136.000Salaries

160,000 suppliers

160,000 withdrawals

16000  rent

20,000 carryover credits

560,000 capital

240,000 loan from the bank

180,000 sales

980.000 980.000
  20,000 transferred credits

 

capital
400,000 cash 160,000 withdrawals

400,000 carryover credit

560,000 560.000
400,000 transferred credits  

 

Rent
16,000 carryover balance 16000 cash
16000 16000
  16000 transferred credits

 

Bank
188,000 carryover balance 68,000/treasury

120,000/sales

188000 188000
  188,000 transferred credits

 

Sales
180,000/treasury

120,000/bank

300,000 carryover balance
300,000 300,000
300,000 transferred credits  

 

Purchases
320,000 carryover balance 120,000/treasury

120,000/suppliers

80,000/treasury

320.000 320.000
  320.000transferred credits

Trial balance template

If you are looking for a PDF trial balance template, simply click here.

The relationship of the Qoyod program to the trial balance

Issuing a trial balance in the Qoyod program is a crucial step in the process of preparing financial reports and financial statements, as the balance aims to review and correct errors before issuing final reports and is an essential part of the accounting cycle.

To issue the balance, you must first set the time period for which you want to issue reports. This period can be quarterly, semi-annually, or annually, and this depends on the needs and requirements of the organization.

After setting the time period, a trial balance report is generated that contains the totals of accounts and their balances during this period.

Using Qoyod, you can complete these steps easily and efficiently, as issuing the scale takes a short time and the process can be carried out quickly and in an in an orderly .

How to verify trial balances via the Qoyod program 

You have many options to verify the trial balance and ensure its accuracy using the Qoyod program. Below are the most important points that you can follow:

Review the trial balance.

You can access the balance by clicking on the drop-down menu, choosing “Reports,” and then “Trial Balance,”  and you will be shown a list of all major financial accounts with their balances.

Filter

You can specify specific accounts and values through the “Filter” feature, through which you can display trial balances according to the item you wish to display, such as customer or supplier trial balances. Finally, you will see all the affected accounts along with those accounts.

Filter by additional fields.

In addition to filtering by main accounts, you can also filter the balance by additional fields, such as projects, products, or employees, allowing you to see the amounts associated with those items.

Choose one account.

You can choose only one account to display in the balance, and it is worth noting that you can choose the account from the drop-down list available in the options.

Detailed calculations

You can also view detailed accounts, such as those of customers, suppliers, and employees. It is worth noting that you can activate this feature by clicking on the activation sign next to it.

Scan feature

The inspection feature allows you to review the details of the amounts that make up the amount shown in the report, as you can view the values of each customer individually, as well as for suppliers, branches, stores, products, projects, employees, and also documents. Therefore, this helps you understand the details of the amounts displayed in the report.

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Conclusion

As we noted earlier, a trial balance is a financial statement that contains two columns, one relating to debit balances and the other relating to credit balances. This design ensures the mathematical accuracy of the accounting bookkeeping process. The balance also includes the debit and credit balances of all the company’s commercial transactions during a specific period of time. These transactions include assets, expenses, and revenues. It is worth noting that the balance can be used to evaluate the company’s financial situation.

If you need assistance in this regard, do not hesitate to contact Qoyod, which is a cloud accounting program that provides you with easy-to-use accounting solutions, as it allows you to prepare the balance and implement your accounting operations, including the point of sale system, inventory, electronic invoice systems, and so on, at prices that suit everyone.

After you learned what a trial balance is and its components, what are you waiting for? Try Qoyod now for free for 14 days and benefit from various packages that meet the needs of all your projects.

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