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

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n the growing world of business and the complex economy, financial auditing plays a vital role in ensuring integrity and credibility. It is the process that enables companies and institutions to evaluate the health of their financial conditions and determine the extent of their compliance with applicable financial standards and regulations. Among the most important financial auditing tools, one stands out: the trial balance, which is an independent financial report prepared in accordance with international accounting standards and aims to evaluate the health of the accounts. The company’s finances are also a powerful lens that sheds light on financial numbers and data and analyzes and evaluates them accurately and impartially. It is worth noting that the financial audit and trial balance are vital tools for enhancing confidence between companies, investors, and external parties. They help provide reliable and transparent information that reflects the true situation of the company and enhances transparency and financial responsibility.

What is the trial balance?

It is an important tool in accounting that aims to collect and summarize debit and credit accounts and determine the balance of each. It promises the end of each financial period, whether monthly, quarterly, or annual. It is worth noting that trial balances are an essential part of the accounting cycle and contribute to ensuring the accuracy and reliability of the facility’s financial records.

In this balance, the sum of the debit balances should be equal to the sum of the credit balances of the registered accounts, as this accounting principle known as the budget principle reflects the balance between available financial resources and their use. In other words, the money paid or owed should be equal to the money collected or received.

Components of this trial

The trial balance consists of three main sections: the various accounts, the debit balance, and the credit balance. So let’s take a look at some of the key points in each section:

Various accounts

This section includes all the different financial accounts that the establishment deals with, and these accounts vary based on their nature and function. For example: There are debit accounts and credit accounts.

  • Debit accounts have a debit balance in the trial balance.
  • Other credits: have a credit balance in the balance.

Expenses

Expenses are part of the debit accounts and include all payments made by the facility in the course of its daily business. For example, expenses include rent, electricity expenses, and employee salaries. It is worth noting that all of these expenses appear in the balance with a debit balance.

Revenues

Revenues represent part of the credit accounts and include all financial returns achieved by the facility. For example, they include sales revenues, revenues from the sale of assets, and revenues from securities. It is worth noting that all of these revenues appear in the trial balance with a credit balance.

Assets

Assets appear on the balance sheet and are divided into two main parts:

  • Current assets: They appear on the debit side of the balance if their value increases and on the credit side if their value decreases.
  • Fixed other: always appears on the debit side because it is permanently owned and used by the facility.

If fixed assets are sold, we have sales revenue that appears on the credit side of the balance.

Liabilities

Liabilities appear on the credit side of the trial balance and are the debts owed by the facility, including loans and other obligations. It is worth noting that liabilities appear in the balance with a credit balance and reflect the financial receivables that the facility must pay to other parties.

The purpose of the trial balance

Trial balances are an important financial tool in institutions, and they have several main objectives, which are as follows:

Preparing financial statements

One of the main objectives of the trial balance is to help the organization prepare financial statements at the end of the fiscal year. This is done by transferring the final balance of expenses and revenues from the trial balance to the income statement and transferring the assets and liabilities accounts to the financial position. Which helps in providing a comprehensive and accurate financial picture of the organization.

Summarizing financial transactions

The trial balance is an effective tool for summarizing the financial transactions that took place in the organization during the accounting period. By reviewing the balance, accountants and auditors can easily know financial transactions without having to refer to journals and read the details of accounting entries.

Error detection

It is also a powerful tool for detecting possible errors when preparing financial accounts, as it is possible for the accountant to make errors while recording daily entries, which leads to the debit side not matching the credit side of the balance. Using these trial balances, auditors can identify and correct these errors before preparing final financial statements.

The importance of trial balance

The trial balance is a vital financial tool in the world of accounting and auditing, and its importance cannot be overlooked for the following reasons:

Detecting mathematical errors

Preparing trial balances for any organization is a crucial process for detecting arithmetical errors that may have occurred in the journals or ledgers. It compares the financial data recorded in accounting books with the actual accounting operations that took place during a specific period of time. Thus, any discrepancies or errors can be detected, and the necessary measures can be taken to correct them.

Summarize calculations

The balance summarizes all the accounting operations that took place in the organization during the specified financial period. It thus provides a comprehensive overview of the financial activities of the organization, and administrators can make sound financial decisions based on this summarized information.

The basis for preparing final accounts

The trial balance is the basic basis for preparing final accounts. It helps in collecting the due balances and transferring them directly to the final accounts. Without it, it will be difficult to collect financial information and prepare the final accounts in a correct and coordinated manner.

Ensure balances match

Trial balances ensure that an organization’s accounts contain the same debit and credit amounts as the journals and ledger. Thus, this enhances the reliability of financial information and ensures the validity and accuracy of accounting data.

Ensuring the accuracy of calculations

The trial balance is primarily responsible for the accuracy of the accounts transferred from the ledger to the trial balance and then to the organization’s balance sheet. The associated financial audit process ensures that the accounts and financial numbers accurately represent the state of the organization and are consistent with applicable accounting standards.

An example of a trial balance

Credit account name debit
…………….. …………………. ……………..
  Cash 400.000
  Accounts receivable 100.000
  Inventory 160.000
  Prepaid expenses 220.000
120.000 Accounts payable  
180.000 Long-term debt  
400.000 Property rights  
320.000 Sales revenue  
  Cost of goods sold 220.000
  Rent expense 20.000
  Salaries expense 80.000
………………… ………………… …………………
Total: 700,000    

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:

Cash
110,000 equipment

60,000 purchases

40,000 purchases

34,000 bank

68,000  Sala ries

80,000 suppliers

80,000 withdrawals

8000  rent

10,000 carryover credits

280,000 capital

120,000 loan from the bank

90,000 sales

490.000 490.000
  10,000 transferred credits

 

capital
200,000 cash 80,000 withdrawals

200,000 carryover credit

280,000 280.000
200,000 transferred credits  

 

Rent
8,000 carryover balance 8000 cash
8000 8000
  8,000 transferred credits

 

Conclusion

The trial balance appears before us as an essential and vital tool in the world of business and accounting. It is like a keen eye that monitors, evaluates, and controls the conduct of financial operations in institutions and ensures transparency and credibility in their financial reports. Through its use, we can restore confidence in the accounting and financial systems by verifying the authenticity of financial records, identifying potential gaps and manipulations, and directing management towards improving operations and enhancing efficiency. Moreover, this balance is a vital tool in ensuring the application of financial and tax laws and regulations and achieving compliance and accountability. It contributes to enhancing transparency and integrity in financial operations and provides investors and shareholders with an independent and reliable view regarding the institution’s financial performance.

With the rapid development of technology, you should use Qoyod as an authorized partner for your business. It is an accounting program that provides you with a point-of-sale system, inventory, electronic invoice systems, and so on, at prices that suit small and medium companies alike.

After you learned what a trial balance is and its components, Try Qoyod now for free for 14 days. To ensure your company’s sustainability and sustainable growth, It is an effective accounting program.

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