Trial Balance – Definition

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Trial Balance Definition

A trial balance is an accounting tool that consists of a bookkeeping worksheet in which the balances of all general ledger accounts are arranged into debit and credit account column totals in such a way that both column totals balance, i.e are equal. The trial balance of a company consists of both its revenue as well as capital ledger accounts and is prepared periodically at the end of every reporting period. A trial balance is a vital component of a company’s accounting process since it verifies the mathematical accuracy of its bookkeeping system. The origin of the trial balance can be traced back to Luca Pacioli’s 1494 work, Summa de arithmetica, where he describes a procedure that is similar in essence to a modern-day post-closing trial balance.

A Little More on What is the Trial Balance

The primary motive behind the preparation of a trial balance by a company is to verify the mathematical accuracy of its bookkeeping system by identifying and rectifying any errors that may have occurred in its double-entry accounting system. Once the debit account column in the balance sheet equals the credit account column, a balance is achieved, which means that the company’s ledgers are mathematically accurate. However, the absence of errors in the ledgers does not automatically imply that the company’s accounting system is accurate. This is evidenced by the fact that a company’s trial balance procedure is simply unable to detect missing or erroneously classified transactions. Thus, a trial balance is very likely to present a perfectly balanced worksheet, notwithstanding the presence of significant accounting errors.

What is a Ledger Account?

A ledger account is a bookkeeping account or a record that is used by a company to organize, preserve and summarize its business transactions. A trial balance worksheet uses numerous ledger accounts that have either been debited or credited or used to document multiple business transactions. The trial balance worksheet displays the closing balance of each of the debited and credited ledger accounts. This closing balance is the aggregate of all debits and credits recorded in the individual ledger accounts.

What are Debits and Credits?

A double-entry accounting system records all business transactions in at least two accounts. The account on the left side column of the balance sheet receives all debit entries and is known as the debit account. Similarly, the account on the right side column of the balance sheet receives all credit entries and is known as the credit account. There is also a third column on the far left of the two columns that displays the account titles. Now, certain accounts such as assets, expenses, dividends or draws and losses are increased with a debit, i.e they should each have a debit balance at the end of the accounting period. Likewise, accounts such as gains, incomes, revenues, liabilities and stockholders’ equity are increased with a credit, i.e they should each have a credit balance at the end of the accounting period. Nevertheless, there are situations where debit accounts have been credited and credit accounts have been debited during the accounting period. This occurs as a result of certain business transactions that reduce the debit and credit balances of the respective accounts.

What is an Undetectable Error?

Once the debit and credit ledger accounts are listed on the trial balance worksheet along with their individual balances, the debit balances and the credit balances are aggregated separately in order to achieve a perfect balance between the total debits and total credits. A balance in the trial balance worksheet  is an indication of accuracy of the double-entry accounting system. Yet, there are certain bookkeeping errors, especially complex mathematical errors, that a simple trial balance is unable to detect. These errors, known as undetectable errors, often arise during the following circumstances:

  • When equal debits and credits are recorded in the wrong accounts.
  • When a transaction is not recorded.
  • When offsetting errors are made simultaneously with both a debit and a credit.

In all the above circumstances, the trial balance will still display a perfect balance between the total debits and total credits.

References for Trial Balance

Academic Research on Trial balance

Origin of the trial balance, Peragallo, E. (1956). The Accounting Review, 31(3), 389-394. This paper studies the history of double-entry bookkeeping and the various methodologies involved in the process. The origins of double-entry bookkeeping can be traced back to the massive growth of commerce in Italy during the thirteenth and fourteenth century following the Crusades. The publication of Paciolo’s Summa in 1494 can be considered the first groundbreaking work on double-entry bookkeeping, although fragmented records exist of similar work from much earlier times, e.g. the Massari Ledgers of 1340.

Entrepreneurial leadership among the “robber barons”: A trial balance, Destler, C. M. (1946). The Journal of Economic History, 6(S1), 28-49. This article studies the activities of certain U.S. entrepreneurs that followed a totalitarian mode of operation in the period before 1903. Aptly tagged robber barons by their contemporaries, these entrepreneurs engaged in ruthless buccaneering and yet their activities went mostly unchecked, except for the mild opposition from certain publicists and vigilante committees. Nevertheless, there have been a few attempts at philanthropy by some of these entrepreneurs, but these have largely gone unnoticed. The author seeks to highlight a few such noteworthy contributions of these robber barons to American business practices.

Counting the accountants: a trial balance for 1911, Matthews, D. (1993). Accounting, Business & Financial History, 3(2), 197-224. This paper samples the activities of accountants in company management in the City of London for the year 1911. The author provides detailed statistical information about the accounting profession, both in terms of its size as well as the monopoly enjoyed by chartered accountants in the sampled city. Notwithstanding the low percentage of the accountants in firms during that period, they still proved to be indispensable to their respective organizations by providing assistance during mergers or other stressful situations.

Analyzing Trial Balance Errors, McGill, E. C. (1946). The Journal of Business Education, 21(9), 24-28. This paper highlights the importance of scrutinizing the different phases of the bookkeeping instructional program from the perspective of an academic instructor. The author stresses on the need to detect and locate errors in bookkeeping, besides ascertaining whether a correct procedure was followed in case a balance is obtained. The paper proceeds to explain the intricacies of a trial balance and suggests that trial balance errors are the outcomes of certain maloperations. The author concludes that trial balance errors can only be located by conducting a systematic check of all possible causes.

The Trial Balance, Stevens, P. (1987). In Work Out Accounting GCSE (pp. 11-15). Palgrave, London. This chapter forms part of the book Work Out Accounting GCSE by P. Stevens. After elaborating the process of posting transactions to ledger accounts, including balancing off cash accounts, the author proceeds to explain with an example the next step in the bookkeeping process, which deals with the examination of balances that exist on the opened accounts.

The Trial Balance, Nicholson, M. (1989). In Accounting Skills(pp. 46-52). Palgrave, London. The objective of this paper is to facilitate an understanding of the function and purpose of a trial balance from a purely academic perspective. The author elaborates with examples the process of drawing up a trial balance to test the arithmetical accuracy of bookkeeping. She also adds that the attainment of a balance does not necessarily imply the absence of errors. The article then goes on to elaborate the various limitations of a trial balance.

The Trial Balance, Bright, G., & Herbert, M. (1990). Mastering Accounting (pp. 39-47). Palgrave, London. This article seeks to elucidate the process of running a preliminary check on the accuracy of the ledger entries in a double-entry bookkeeping system. The procedure initiates with a balancing of the accounts involved, followed by the actual drafting of the trial balance. The authors also elaborate the utility of the folio column in the ledger as an effective system of reference for the double entries. This has proved to be a fast and effective method of ensuring the correctness of double entries.

The Trial Balance, Hussey, J., & Hussey, R. (1999). In Business Accounting (pp. 62-72). Palgrave, London. A trial balance offers an effective evaluation of the double-entry bookkeeping system by checking for a balance in the debit and credit totals. Such a system mandates a series of checks for identification and rectification of any errors, followed by the drawing up of the trial balance. This procedure is repeated until the debit and credit columns balance. This article seeks to elaborate the following processes: Determining whether an individual account has a debit or a credit balance. Constructing a trial balance from scratch using available figures. Identifying anomalies in case the credit and debit columns do not balance.

FEATURES OF USING TRIAL BALANCE IN INTERNATIONAL ACCOUNTING, Kovalchuk, A. (2013). ACTUAL PROBLEMS OF UKRAINE’S ECONOMIC SYSTEM PERFORMANCE, 99. This paper offers an insight into the attributes of a trial balance worksheet as an instrument used in international accounting. The author samples performance data from Ukraine’s  economic system and highlights the problems that negatively affect the system.

Trialbalance information, Hodges, B. W. (1922). Journal of Accountancy (pre-1986), 34(000001), 34. This paper highlights the efficacy of a trial balance in providing information pertaining to inventory and gross profit from sales, when the same cannot be derived from monthly profit and loss statements. An accurate comparison of trial balances followed by a detailed summary of the changes in accounts provides a perspective view of the net result of the transactions occurring during the month. This makes it possible to readily record any change in position.

The philosophy of accounts: Chapter XIV. The trial balance, Sprague, C. E. (1907). Journal of Accountancy (pre-1986), 4(000003), 198. Transactions in a ledger are deemed to be correct when the debit side totals and the credit side totals are exactly equal. Once the ledger entries are fully entered, a trial balance is drawn up. In the event that the system incorporates subordinate ledgers, the trial balance can be condensed by entering only aggregate values. The paper explicates the above with the help of a simple example of a condensed trial balance of a mercantile company.

Errors Not Affecting Trial Balance Agreement, Nicholson, M. (1989). In Accounting Skills (pp. 246-255). Palgrave, London. This paper scrutinizes the role played by a trial balance in determining the arithmetical accuracy of the bookkeeping process employed by a business. A trial balance is a recurrent process that ensures that there is an equality of total value between account items entered on the debit side and account items entered on the credit side. The bookkeeping process is deemed to be satisfactory when a balance is struck, i.e when the two columns perfectly tally with each other.

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