The trial balance is one of the most useful reports from an accounting system if you want to see a business’s accounts at a point in time. Auditors are known for wanting to get ahold of the trial balance to see the accounts. We will look further at why a trial balance is so useful.
What is Trial Balance in Accounting?
The trial balance is a report that shows the totals of each account in a business at a point in time. It provides a useful check that “everything is in balance”. The debits and credits in a trial balance should always net to zero.
It is important to make the distinction that the trial balance is not a financial statement but instead an internal report of a business.
Why is a Trial Balanced Used?
The trial balance is used by business owners and auditors to see the account at a point in time. Want to see the accounts on June 30? Run a trial balance. Want to see the balance of accounts at December 31? Run a trial balance.
Once you have a trial balance you can do a high-level scan of the accounts. It is easy to see how much cash is on hand, inventory or how much has been spent on office expenses for the year.
Read More:
Accounting Account Definition: (What Exactly is an Account?)
Who uses a Trial Balance?
As we mentioned it is generally business owners and auditors who get hands-on with the trial balance, along with the internal accountants of the business.
Trial balances aren’t available to individuals external to the business and are usually not available to stakeholders as well so it is usually an internal report except for the auditors.
Looking at an Example of a Trial Balance (Understanding the TB)
It might make more sense if we look at an example of a trial balance or TB as accountants call it. This example we have made up is for our fictitious company Busy Bee Bakery.
Trial Balance for Busy Bee Bakery on the 31st of December 2022
| Accounts | Debit | Credit |
| Cash | $24,900 | |
| Accounts Receivable | $100 | |
| Inventory | $750 | |
| Accounts Payable | $500 | |
| Equity Shares | $12,000 | |
| Wages Payable | $250 | |
| Revenue | $50,000 | |
| Cost of Goods Sold | $12,000 | |
| Wage Expense | $15,000 | |
| Rent Expense | $10,000 | |
| Total | $62,750 | $62,750 |
So, what are the major takeaways? You can see that the company has quite a bit of cash on hand and low accounts receivable. The big takeaway though is the total of the debit less the credits equal zero.
This is important to note the trial balance, balances. The above trial balance would be considered unadjusted. Soon, we’ll explain an adjusted trial balance.
How to is a Trial Balance Prepared?
Usually, a trial balance will be a system generated from software like Quickbooks or Freshbooks. If you had to prepare one, you’d take all the balances from the accounts in the general ledger and put them into the form of the trial balance.
It’s important to grab the account totals from the general ledger and not the individual transactions. Once every account balance is populated in the trial balance, the debits and credits need to be summed and checked that they balance to zero.
The Adjusted Trial Balance: What is It?
The adjusted trial balance is similar to the trial balance and you actually use the trial balance as a starting point. From there, you adjust for specific journal entries. The journal entries will generally have a description in the accounting system so you can see exactly what they apply to.
The report is extremely useful to see how the accounts get to their final balance post
adjustments.
Why are Adjustments Made?
Common adjustments are to accrued expenses, prepaids and depreciation. Typically any adjustments are made at the end of the accounting period.
This could be the last day of a month, quarter or year so that the financial statements are in accordance with the accrual basis of accounting.
Adjustments could look like this:
- A customer paid in advance a large fee for a year of services. Each period, the liability of unearned revenue decreases with an adjusting entry as it is earned.
- Supplies came into the business but the invoice didn’t get put into the accounting system until the last day of the accounting period.
The main goal of any adjustments would be to align with Generally Accepted Accounting Principles (“GAAP”) which says to use accrual accounting.
An Example of An Adjust Trial Balance
An adjusted trial balance will look like this:
Trial Balance for Busy Bee Bakery on the 31st of December 2023
| Accounts | Debit | Adjustments | Adjusted Trial Balance |
| Cash | $24,900 | $24,900 | |
| Accounts Receivable | $100 | $1,000 | $1,000 |
| Inventory | $750 | $750 | |
| Accounts Payable | ($500) | ($500) | |
| Equity Shares | ($12,000) | ($12,000) | |
| Wages Payable | ($250) | ($250) | |
| Revenue | ($50,000) | ($1,000) | ($51,000) |
| Cost of Goods Sold | $12,000 | $12,000 | |
| Wage Expense | $15,000 | $15,000 | |
| Rent Expense | $10,000 | $10,000 | |
| Total | $0 | $0 |
You’ll see above an adjustment was made for $1,000 of earned but unbilled sales for the period.
Preparing the Adjusted Trial Balance
Preparing the adjusted trial balance is no harder than taking the prepared TB and pushing through any applicable adjustments for the period not captured.
You’ll need an understanding of accrual accounting to know what to adjust for but once you get the hang of it, you’ll see that a lot of the adjusting entries are similar.
Let’s Recap the Trial Balance
There are a few key points to recap a trial balance as follows:
- A trial balance is an internal report and not a financial statement.
- It shows the totals of all accounts from the general ledger at a point in time.
- The sum of the debits and credits should always net to zero, hence it should balance.
- The adjusted trial balance uses the unadjusted trial balance and pushes through entries to be compliant with the accrual basis of accounting.
Trial Balance with Examples: Final Thoughts
It’s not every day that you will use a trial balance unless you are an auditor. Then you might use it all the time. Having an understanding of a trial balance will help you see the business’s accountant at a point in time.
While it isn’t a set of financial statements, a trial balance can still be useful in making financial decisions.
