Preparing and debugging a Trial Balance

What a trial balance is

At the end of the month every account in the general ledger is balanced off, and every balance is copied into one list with two money columns: debit and credit. That list is the trial balance.

It is not a financial statement and nobody outside the business ever sees it. It is a test. Every transaction was entered twice, once as a debit and once as an equal credit, so when every balance is added up, the two columns must come to the same total. If they do, the arithmetic of the ledger is sound and the accountant can safely start preparing the financial statements. If they do not, something is wrong and it must be found first.

Two sections, and where each account goes

The trial balance is written in two parts.

Balance sheet accounts section. The accounts that carry a balance forward into next month: Capital, Drawings, assets like Land and buildings, Equipment, Trading stock, Debtors control, Bank and Petty cash, and liabilities like Loans and Creditors control.

Nominal accounts section. The accounts that measure this year's performance: Sales, Debtors allowances, Cost of sales, Rent income and Interest income, and every expense.

Which column a balance goes in is decided by its normal balance, not by guesswork. Assets, expenses and Drawings sit on the debit side. Liabilities, income and Capital sit on the credit side. Debtors allowances is the odd one out worth remembering: it is a reduction of income, so it sits in the debit column.

Worked example. A trial balance is drawn up and the debit column totals R811 400 while the credit column totals R812 120. It is out by R720.

Work through the differences in order, cheapest test first.

1. Add both columns again. A large share of differences are simply addition errors on the trial balance itself.
2. Divide the difference by 2. R720 / 2 = R360. If a balance of R360 was written in the wrong column, the correct column is short R360 and the wrong column is over R360, which is a gap of R720. Scan for a R360 balance in the wrong place.
3. Divide the difference by 9. If it divides evenly, suspect a transposition: R540 written as R450 gives a difference of R90, and 90 divides by 9. Look for two digits that have swapped places.
4. Look for the difference itself. A balance of exactly R720 may have been left out of the list, or posted on one side of the ledger only.

In this case a check of the ledger shows Insurance of R360 sitting in the credit column. Moving it to the debit column brings both totals to R811 760, and the books balance.

Core checkpoint: The trial balance answers exactly one question: do the debits and the credits agree? A yes is worth having, because it rules out a whole family of arithmetic errors, but it is not a certificate of correctness. Treat a difference as information about where to look, not as a disaster: the size of the difference usually tells you what kind of mistake to hunt for.