In today's world, Trial balance has gained unusual relevance. Whether due to its impact on society, its influence on popular culture or its importance in the scientific field, Trial balance has positioned itself as a topic of indisputable interest. Throughout history, Trial balance has been the subject of multiple studies, debates and reflections, which demonstrates its relevance in different spheres of life. In this article, we will explore different aspects related to Trial balance, analyzing its evolution over time and its impact today. In addition, we will delve into the multiple perspectives that exist around Trial balance, with the aim of offering a panoramic and enriching vision of this topic.
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A trial balance is an internal financial statement that lists the adjusted closing balances of all the general ledger accounts (both revenue and capital) contained in the ledger of a business as at a specific date. This list will contain the name of each nominal ledger account in the order of liquidity and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The trading profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the same balance.
The first published description of the process is found in Luca Pacioli's 1494 work Summa de arithmetica, in the section titled Particularis de Computis et Scripturis. Although he did not use the term, he essentially prescribed a technique similar to a post-closing trial balance.[1]
The primary purpose of preparing a trial balance is to ensure the accuracy of an entity's double-entry bookkeeping system.[citation needed] Accounting equation rule states that there must be equal debit and credit for every financial transaction, therefore, the value of all the debit and credit balances on trial balance must be equal.[citation needed] If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced. Hence trial balance is important in case of adjustments. Whenever any adjustment is performed run trial balance and confirm if all the debit amount is equal to credit amount.
The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.
Normal Balances refer to whether the balance for an account in a properly-formed trial balance is usually a debt or a credit. A normal balance also reflects the accounting equation. If a trial balance for an account is reversed, such an account is called a "contra-account" (e.g. accumulated depreciation as an asset or owners drawings as equity). The normal balances are as follow:
Debit | Credit |
---|---|
Assets | |
Liabilities | |
Equity | |
Owner's Drawing | |
Retained Earnings | |
Revenue | |
Expenses |
The sum total of each column should be equal, or "balance." The act of "closing the books" refers to zeroing out all the revenue and expense amounts at the end of an accounting period (typically a fiscal year) and adding the difference to the retained earnings account. This is called a "closing entry." If the company earned a profit, the retained earnings account will be increased. If the company experienced a loss, the retained earnings account will be reduced. The resulting opening balance for the new accounting period will still have columns of equal sum totals.
A trial balance only checks the sum of debits against the sum of credits. That is why it does not guarantee that there are no errors. The following are the main classes of errors that are not detected by the trial balance.