A trial balance is something often referred to by accountants and here at www.CheaperAccountant.co.uk we are no different. Our accountants can be found guilty of using the same terminology on more than one occasion. This blog post will explain what a trial balance is so that you’re more informed the next time your accountant refers to this.
A trial balance is in simple terms a list of all general ledger accounts (both profit and loss account and balance sheet related) operated by the company. The list will describe the nature of the ledger account (such as sales, wages, cash at bank, debtors, creditors) alongside the associated monetary balance. This monetary balance will be either a debit (assets and expenditure) or a credit (liabilities and revenue).
The trial balance is the first step towards preparing a companies profit and loss account and balance sheet. The upper section often contains the profit and loss account items and the lower section the balance sheet items, although this can be shown in reverse.
The trial balance gets its name from the purpose of this statement. A trial balance is prepared to prove that all debits and credits do in fact balance. This also effectively proves that the primary statements (profit and loss and balance sheet) are in fact correctly balanced. The trial balance is an important element of double entry book keeping.
You will find that a trial balance is generally completed annually when the annual company accounts are prepared. Larger companies do prepare trial balances on a more regular basis for monthly financial reporting to the board of directors.