Analyzing Transactions

Trial Balance

A list of all accounts and all balances in those accounts at a given point in time makes up the trial balance.

The trial balance is a list of an organization's accounts and their balances on a specific date. It reflects the initial accumulation of accounts at the end of an accounting period for purposes of analysis and adjustments. The trial balance shows each account, often with the account number and the balance in each account, on the date of the report. The balance in each account is either a net debit or a net credit. The total of the debits has to equal the total of the credits. If the totals do not match, an error has been made in the entries, or more likely, an account is missing. Computerized systems prevent unbalanced entries from being made but may not prevent errors in creating a report.

A trial balance is prepared by taking the balance in each account in the general ledger and transferring each balance to a single page. For example, if no new shares were issued between June 1 and December 31, the balance in the common stock account would still be a credit of $100,000 as shown in the journal entry below. The ledger amount has not changed since the company was started.

General Journal Entry

Date Entry No. Account No. Account Name Debit Credit
2018-06-01 JE#1 1000 Cash $100,000.00
3000       Common Stock $100,000.00
To record initial investment in company

The trial balance is used to help prepare adjusting entries to the accounts as well as the final financial statements. These are necessary to capture economic events that are not captured directly through transactions. Simple adjusting entries can be made by a bookkeeper. More advanced entries require the greater knowledge and experience of a professional accountant.

In the trial balance chart, adjustments have already been made to record the wear and tear on the building and the machinery, known as depreciation expense. The amount of depreciation accumulated is tracked separately from the underlying asset. Extra accounts could be added to the original list.

Trial Balance with Adjustments

Adjustments have already been made in this trial balance to record the wear and tear on the building and the machinery, known as depreciation expenses.
The process of recording and adjusting entries can be an involved and iterative process; therefore, accountants may create several versions of the trial balance as they work through their adjustments. An adjustment to expenses will affect the net income. In turn this affects the estimate of corporate income tax. For this reason corporate taxes are estimated near the end of the trial balance, but if an adjustment is necessary, it must be done. Remember: the business is still operating while the accounting work is being done. Perhaps a customer found some goods they had received that were defective. If the value of the goods is large enough, an adjustment may need to be made to reduce the previous period's sales by the amount of the defective goods.

This trial balance is almost ready to be used to create the financial statements. If this is the end of the fiscal year for the company, the income statement accounts will have to be summarized, after which these accounts are cleared and reset for a new reporting period. The revenue and expense accounts are cleared to the retained earnings account, which is another account added to the original list. It is the accumulation of past earnings that have not been distributed to shareholders in the form of dividends.