Accounting and bookkeeping
Trial balance (TB)
A trial balance is an internal accounting report that lists the closing balances of all general ledger accounts to verify that total debits equal total credits.
What is Trial balance?
A trial balance is a foundational worksheet in double-entry bookkeeping. It compiles the ending balances of every account in your general ledger at a specific point in time, usually the end of a reporting period. The report features two columns: one for debit balances and one for credit balances. Because every transaction has equal and opposite entries, the sum of the debit column must exactly match the sum of the credit column. You use this report to catch mathematical errors before generating your formal financial statements. If the two columns do not match, you know an error occurred during journal entry posting. However, it is vital to remember that a balanced trial balance does not mean your books are completely free of mistakes, as it cannot detect missing transactions or entries posted to the wrong account.
Total Debit Balances = Total Credit Balances
If the two totals are not equal, a mathematical error exists in the ledger.
How Trial balance works
Preparing a trial balance happens at the end of an accounting period, just before you draft your profit and loss statement and balance sheet. First, you must ensure all daily transactions are posted to the general ledger. Next, you calculate the final closing balance for every individual account. You then list each account name alongside its final balance, placing debit balances in the left column and credit balances in the right column. Finally, you add up both columns. If the totals match, your books are mathematically balanced. If they differ, you must investigate the ledger to find the discrepancy, which could be a transposition error or a one-sided journal entry.
- Post all business transactions to the general ledger accounts.
- Calculate the closing balance for each individual ledger account.
- List all accounts with their balances in respective columns.
- Sum the total of the debit column at the bottom.
- Sum the total of the credit column at the bottom.
- Compare the two totals to ensure they are exactly equal.
Worked example
Consider a new trading business called Gulf Traders. At the end of the month, their ledger shows Cash with a debit balance of 10,000, Inventory with a debit balance of 5,000, and Rent Expense with a debit balance of 2,000. On the credit side, they have a Bank Loan of 7,000 and Owner Equity of 10,000.
The total debits equal 17,000 (10,000 + 5,000 + 2,000). The total credits equal 17,000 (7,000 + 10,000). Because 17,000 equals 17,000, the trial balance is successful. Please note that a balanced trial balance does not prove the books are correct, as an invoice might still be missing entirely.
Why it matters for your business
Business owners should care about the trial balance because it acts as an early warning system for accounting mistakes. Catching a data entry error here prevents that mistake from flowing into your final tax returns or financial statements. If you present inaccurate reports to a bank or an investor, you risk losing credibility or facing compliance penalties. Running this report regularly helps maintain clean financial records and ensures your trial balance is ready for year-end closing. Paper & Pen automatically posts journal entries and generates your trial balance in the background, saving you from manual calculations.
See also
Questions
Common questions
What errors will a trial balance not detect?
What is the difference between an unadjusted and adjusted trial balance?
How often should I prepare a trial balance?
Related terms
- General ledger A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Double-entry bookkeeping Double-entry bookkeeping is a fundamental accounting method where every financial transaction requires at least two equal and opposite entries to keep the accounting equation perfectly balanced.
- Journal entry A journal entry is a formal accounting record that logs a business transaction by showing the date, the accounts affected, and equal debit and credit amounts.
- Chart of accounts A chart of accounts is a complete, organised list of every financial account used by a business to record transactions and prepare financial statements.
- Balance sheet A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time to provide a snapshot of its overall financial health.
- Accounts payable Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.