A trial balance is a financial check-up for a business. It’s a summary report that lists all the accounts in a business’s accounting system – including assets, liabilities, income, and expenses – along with their balances at a given time.
A trial balance can show whether the total of your debits equals the total of your credits. In double-entry accounting, every transaction has two sides (a debit and a credit) and the trial balance verifies that all transactions are recorded correctly. If the totals don’t match, that’s a sign that your books might contain a missed entry, typo, or misclassification.
Although a trial balance cannot guarantee that your books are perfect, it can effectively catch obvious mistakes and confirm that your books are balanced before you create more detailed financial statements such as income statements and balance sheets.
Below, we’ll explain what you should know about a trial balance, including how to prepare this accounting worksheet, what it can tell you about your business, and its limitations.
What’s in this article?
- How is a trial balance prepared?
- What does a trial balance tell you about your finances?
- What are the limitations of a trial balance?
- How do you correct discrepancies in a trial balance?
How is a trial balance prepared?
To prepare a trial balance, first gather the balances of all the accounts from your general ledger. These include assets, liabilities, equity, revenue, and expenses. Create a two-column format, one for debits and one for credits, then write each account’s name and its respective balance in either the debit or credit column.
Next, add up all the debit balances and all the credit balances. The totals in your debit and credit columns should be equal. If they aren’t, double-check your entries for:
Missing or duplicated transactions
Incorrect recording (e.g. putting a debit in the credit column or vice versa)
Mathematical mistakes
If you find errors, correct them in your ledger. Once they’re fixed, run your calculations again. Once the debit and credit columns are equal, your trial balance is complete and can be used to prepare financial reports.
What does a trial balance tell you about your finances?
The main purpose of a trial balance is to check that the total of your debit balances equals the total of your credit balances. This confirms your bookkeeping entries are in line with the fundamental accounting equation:
Assets = Liabilities + Equity
If debits and credits don’t match, that’s a sign that something went wrong, such as the following:
An entry was recorded on only one side.
Numbers were transposed or miscalculated.
Beyond this function, a trial balance provides a high-level view of the balances in all your accounts. It shows you:
How much cash you have
The size of your receivables or payables
Your total income and expenses
You can use your trial balance as a starting point for creating income statements and balance sheets. By reviewing your trial balances, you might also notice trends (e.g. growing expenses, falling revenues) or potential warning signs (e.g. unusual account activity, missing balances).
What are the limitations of a trial balance?
A trial balance is a good way to ensure bookkeeping accuracy at a basic level, but it’s not a comprehensive error-checking tool or a substitute for deeper financial analysis. For the full picture, you need to pair the trial balance with detailed reviews and full financial reports. Here’s what a trial balance won’t capture:
Omission errors: If a transaction is completely left out, the trial balance will still appear complete.
Misclassification: If a transaction is recorded in the wrong account but the debit and credit sides are correct, it won’t be flagged. Similarly, if accounts are misclassified (e.g. an expense recorded as an asset), the trial balance won’t catch this problem.
Compensating errors: If two unrelated errors offset each other, the totals will still match.
Error of principle: Recording a transaction in the wrong category (e.g. treating a capital expense as a revenue expense) won’t affect the trial balance.
Inaccurate numbers: The trial balance will show your debits and credits as mathematically accurate, but it can’t confirm whether the amounts you’ve recorded are correct.
Financial health: A complete trial balance doesn’t necessarily mean the business is in good financial shape. It doesn’t indicate profitability, liquidity, or solvency.
Financial insight: A trial balance isn’t a tool for in-depth financial analysis. It summarises account balances but doesn’t offer a detailed breakdown of transactions or explain why certain balances exist.
How do you correct discrepancies in a trial balance?
Fixing discrepancies in a trial balance is an important step to ensure your books are accurate. Here’s some practical advice for spotting and correcting these issues:
Start with the basics. Add everything up again and recheck your totals for debits and credits. Often, a simple maths error is the cause.
- Consult your ledger. Cross-check the balances from your trial balance against the general ledger. Did you skip a line or copy something wrong?
- If the totals still don’t match, take a closer look at the discrepancy between credits and debits:
- A small, uneven discrepancy might suggest a typo, such as writing an entry as £1,500 instead of £1,550.
- A large number could indicate that an entire transaction is missing on one side.
- If you can divide the difference by 9, that’s a sign you might have transposed digits somewhere – for example, a £2,340 expense recorded as £2,430.
- Consult your ledger. Cross-check the balances from your trial balance against the general ledger. Did you skip a line or copy something wrong?
If it’s still unclear what is causing the discrepancy, look for:
- One-sided entries: Did you forget to record the other half of a transaction? For example, if you recorded cash received by crediting accounts receivable but didn’t debit the cash account, that’s an easy fix.
- Reversals: Maybe you accidentally swapped the debit and credit sides. This is a common mistake when you enter data manually.
- Misclassified accounts: An expense recorded in the wrong category can throw your trial balance off without affecting the totals in the ledger.
- One-sided entries: Did you forget to record the other half of a transaction? For example, if you recorded cash received by crediting accounts receivable but didn’t debit the cash account, that’s an easy fix.
If your business handles a large number of accounts, tackle them in sections. First, check only the revenue and expense accounts. Then, double-check your assets and liabilities.
If you’re holding unclassified transactions in a suspense account temporarily, address them now. These balances often point to unresolved issues and reconciling them can fix the discrepancy.
Document the places where errors have occurred and how you fixed them. These notes can reveal patterns over time in how mistakes happen, which can help you prevent them in the future.
Once you’ve corrected your discrepancies, recalculate the trial balance to confirm the two sides match.
If you’re frequently finding trial balance errors, take a step back and evaluate your processes. Could accounting software reduce manual mistakes? Would clearer documentation help with recording transactions? Fixing the root causes in your system can save you hours of troubleshooting next time.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.