The trial balance is a financial report that consolidates all the company’s accounts, showing their debit and credit balances.
It is an essential tool for ensuring proper control, accuracy, transparency and organization in the accounting of any company. Its primary purpose is to facilitate verification, ensuring that all accounts are balanced and to identify potential errors in the recording of transactions.
The trial balance also plays a key role in ensuring compliance with legislation and supports more informed financial decision-making.
In the trial balance, it is crucial to verify that debits and credits match. This verification process helps identify errors before submitting financial reports, such as the balance sheet and profit and loss statement.
Composition of the Trial Balance
Credit and Debit Balances
Each transaction carries either a debit or a credit balance, depending on the nature of the transaction. Typically, assets and expenses have debit balances, while liabilities and income have credit balances.
Transactions During the Period
The trial balance includes all transactions recorded in each account during the period. It encompasses all debits and credits, such as purchases, sales, payments made, and collections.
Totals
The total sum of the debit balances and credit balances must be equal. This ensures that there are no errors in the recording of transactions.
Common Errors:
- Omission of Accounts in the Accounting Record: This occurs when not all accounts used during the period are included in the records.
- Duplicate Transactions: This error happens when a transaction is recorded more than once.
- Lack of Adjustments: This refers to the failure to make necessary manual journal entries to accurately reflect the financial reality.
Differences Between the Trial Balance and the Balance Sheet:
- Trial Balance: It is primarily used to verify that debits and credits are in agreement. It helps detect possible errors in the recording of transactions.
- Balance Sheet: Provides a detailed overview of a company’s financial position at a specific point in time. It shows the value of assets, liabilities, and equity, which allows us to evaluate the company’s solvency and liquidity.
Run the trial balance in Xero
- In the Accounting menu, select Reports.
- Find and open the Trial Balance report. You can use the search field in the top right corner.
- Set a Date or click the arrow next to the date to choose a set reporting period, eg End of last month or End of last quarter.
- Select any other options you want the report to show.
- Click Update.
If you need help with this, or with other advice, then please get in touch with our accounting team.