What Is Trial Balance: Definition and Examples

trial balance

You’ve hired a bookkeeper or engaged an independent firm to handle the accounting for your small business. Now you can focus your time and energy on doing the things you do best to grow your business. If your tax accountant has presented you with an adjusted trial balance, you may be wondering what it is, what you should do with it, and how it fits in with your other financial reports.

Rest assured, getting an adjusted trial balance from your tax accountant doesn’t necessarily mean your books aren’t being kept accurately throughout the year. In fact, if your accountant isn’t voicing any concerns, chances are good your bookkeeping is just fine.

Let’s start by looking at what a trial balance is, and what it isn’t.

What Is a Trial Balance?

The trial balance is a worksheet that shows the totals in each account in a business’s chart of accounts. Debit balances are shown in the left-hand column, and credit balances are shown in the right-hand column. When these two columns are totaled, they should be identical, which indicates the books are in balance.

However, a trial balance is not a failsafe. It is good for detecting transposed numbers, mathematical errors, and one-time errors in recording a transaction as a debit instead of a credit (or vice versa). But it will not detect transactions which are omitted altogether or transactions where the debits and credits are reversed for the same transaction.

Even though its name is similar to the balance sheet, the trial balance is not a financial statement. The balance sheet is a snapshot of the asset, liability, and equity accounts of a business, whereas the trial balance includes all accounts—including expense and income accounts—where activity has occurred during the accounting period. The trial balance is instead a workpaper used to ensure the accuracy of the balance sheet and the income statement (or profit and loss statement).

Trial Balance Example

Let’s say you purchased some gourmet tea for your staff break room. The tea cost $75.00, and you wrote a check for it. The entry for this purchase would be:

  • Debit: Break Room Expenses $75.00
  • Credit: Checking Account $75.00

If you use accounting software, you’ll likely only need to enter one side of a transaction. The other side is taken care of automatically as a feature of the software.

If you were to record this transaction on paper, however, the process would take more than one step:

  1. You would record the $75.00 credit in your checking account register.
  2. Then you would record the $75.00 debit in your expenses journal.
  3. Finally, you would record both sides of the transaction in the general ledger, debiting expenses and crediting the checking account.

But, you’ll need to be careful during this process. You can probably already see the opportunities for errors here:

  • There are four chances for you to accidentally transpose the seven and the five while entering the transaction, which means you could record the transaction as $57.00 instead of $75.00.
  • There is a risk of entering the transaction as $7.50 instead of $75.00—after all, $75.00 is quite a bit to spend on tea.
  • You could also easily enter the $75.00 in the wrong column in the ledger, inadvertently increasing or decreasing the wrong account.

If you had transposed the seven and the five, or if you had entered the amount in the debit column instead of the credit column (or vice versa), your trial balance wouldn’t balance. This would then trigger the process of finding and correcting the error and then entering the adjustment.

A (very simple) trial balance for our example might look like this, if the entry was misrecorded as $57.00 for Break Room Expense:

adjusted trial balance example

There is an $18 difference between the debits and credits in the first two columns of the trial balance worksheet. When we review our books, we find that the numbers were transposed when we entered the purchase for the tea, and so we make an adjustment of $18 to the debits for that expense account.

Finally, we create the adjusted trial balance and total the columns to make sure they are now in balance. That part of the process can be a lot of work, but it was a necessary step in making sure the books were kept in balance. Fortunately, this work can happen automatically when using accounting software.

If the entry for the purchase of the tea was not entered at all, or if the checking account was debited instead of credited—and the expense account credited instead of debited—the trial balance would still be in balance, even though the books would be inaccurate. There are other steps in the bookkeeping process—such as the bank reconciliation process—which help detect errors of this nature.

How to Use a Trial Balance for a Tax Return

Next, let’s look at how your tax accountant might use a trial balance to prepare your books for the tax return. We’ll assume your bookkeeper has done an excellent job, all transactions have been recorded properly, and all your bank and credit card accounts have been reconciled.

When your accountant is reviewing your books, he notices your bookkeeper recorded a purchase to an asset account during the previous year. Under generally accepted accounting principles, this entry is correct; however, under the current tax code, this purchase falls under the safe harbor limit and can be fully expensed in the current year instead of depreciated over several years.

In order to prepare the books for the tax return:

  • Your tax accountant prepares an adjusted trial balance to move the purchase from assets to expenses. He includes this adjusted trial balance in his workpapers and on the tax return as a book to tax adjustment.
  • Your accountant might ask you to have your bookkeeper make an adjusting entry into your books to ensure the books match the tax return, but he also might not have a problem with your bookkeeper continuing to follow GAAP guidelines and depreciating the asset on the books over time, even though he has treated the purchase as an expense for tax purposes.

Trial Balance and Audits

Now, you might have seen the word “auditor” mentioned above and be wondering about that. Many businesses—and most nonprofits—will from time-to-time engage an independent auditor to audit and provide an opinion on the books. During this process, the auditor will likely find some transactions he would like to see recorded differently in order to ensure the financial statements for the business accurately represent the business’s financial position.

The auditor will not make adjustments to the books himself. That would compromise the independent nature of his engagement. But he will create an adjusted trial balance and a set of adjusting entries to make to the books, which will bring the financial statements into alignment with his recommendations.

The Bottom Line

Even though it is no longer typically part of the bookkeeping process, the trial balance still plays an important role, especially for tax professionals and independent auditors. Since it is not a financial statement, it’s possible, even likely, you will not often see it or even hear it mentioned. Still, it’s important to understand the trial balance’s purpose.

If you are presented with an adjusted trial balance, ask your accountant or auditor to explain the adjustments made. They can help alleviate any concerns you have, or advise you if the trial balance indicates changes need to be made to how your bookkeeping is conducted.

Billie Anne Grigg

Billie Anne Grigg is a contributing writer for Fundera.

Billie Anne has been a bookkeeper since before the turn of the century. She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, FreshBooks Certified Beancounter, and a Mastery Level Certified Profit First Professional. She is also a guide for the Profit First Professionals organization. 

Billie Anne started Pocket Protector Bookkeeping in 2012 to provide an excellent virtual bookkeeping and managerial accounting solution for small businesses that cannot yet justify employing a full-time, in-house bookkeeping staff.

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