A trial balance is simply an inventory list of the financial accounts included in a company’s financial ledger. This inventory list will consist of the name of every financial account listed and the current value of that particular account. Each financial account will have a balance or a liability. A trial balance will show the current assets, current liabilities, and current surplus or deficit.
A trial balance is used primarily as an itemization of income on a regular basis. It also helps to provide an accurate snapshot of the general ledger. Many companies use the trial balance as a way to determine what their current operating procedures are and to ensure that there is no deviation from the normal operation of the company while the company undergoes its annual audit. Because it only shows the debits and credits and does not show the loans or advances, it is known as a good indicator of the health of the company’s finances.
A trial balance provides an accurate accounting picture of the company’s current operating condition. It aids management in determining which areas of the company need immediate attention and which do not. For example, a company could identify areas in its accounting that need additional oversight due to inconsistencies in recording and reporting, and then establish an appropriate checking and balance procedure for those areas.
To prepare the general ledger balance sheets for the trial balance, all debits and credits are compared with the amounts recorded on the books. All revenue and expense items are then listed, including the gross sale amounts, chargebacks, and total collections. The balances will vary between zero and revenue. All revenues and expenses are then matched using specific formulas to come up with a positive net amount. The company must compare these figures to the corresponding sums on the balance sheet to ensure that the overage is appropriately reflected.
To prepare the financial statements for the trial balance, accounting reports can be prepared using the trial balance as the supporting documentation. If an audit of the company’s records is requested by the CEO, the accountant can prepare a report based on the trial balance, and compare it with the general ledger. Auditors do not have to reconcile differences between the trial balance and the general ledger, unless they find significant discrepancies that require correction. However, they should make sure to check all balances against the other records. Accounting experts also prepare statements of adjustments for the trial balance in order to make them comparable with other financial statements.
Some business houses prefer to use their trial balance as the basis for creating the balance sheet and reserve the right to change the trial balance at any time. This option eliminates the possibility of human error, and ensures that all transactions reflect exactly how much the trial balance was previously. A trial balance in bookkeeping is useful in many ways. The most obvious is when the company wants to know its precise position at any particular moment in time or wants to check the correctness of the previous computations. Another obvious use of the trial balance in bookkeeping is when a CEO wants to know the net effect of a new policy that has just been implemented.