Trial balance – What is a trial balance report?
A trial balance is an internal financial report that lists the ending balance of each general ledger account.
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The main purpose of the trial balance report is to make sure that the total of all credits is the same as the total of all debits. This ensures that every journal entry is balanced and makes it easier to produce accurate financial statements at the end of each accounting period.
If the trial balance report picks up a discrepancy between the total credits and total debits, these differences can be investigated and resolved before producing financial statements. If errors are not picked up on until after financial statements have been produced, it can be much more complicated and time-consuming to fix any mistakes.
Format of a trial balance report
A trial balance report contains four columns:
- Account number
- Account name
- Ending debit balance (if applicable)
- Ending credit balance (if applicable)
The name and closing balance of each nominal ledger account is listed on the trial balance report under these columns.
Generally, assets, expenses and loss are recorded as debits, whilst liabilities, capital, and income are recorded as credits.
If accounts have been kept correctly, the total debit balance should match the total credit balance.
Limitations of a trial balance
There are two main limitations of a trail balance report. Firstly, because a trial balance only checks whether the total debits match the total credits, it cannot guarantee that there are no errors.
For example, if an original entry was recorded incorrectly – such as a purchase for £40 recorded as £4 – the trial balance report would not pick up on this error. Although the entry is incorrect, the mistake goes undetected because the mistake is the same in both the debit and credit accounts – £36 less than it should be.
Secondly, advances in technology have significantly reduced the need for trial balance reports. A trial balance’s main purpose is to help with the preparation of financial reports but, as this can now be done automatically, trial balances are effectively being replaced by computerised accounting systems.
