Under double entry bookkeeping conventions, every transaction must include a debit and a corresponding credit. This is according to the accounting equation, which states that a company’s total assets must be equal to its total liabilities plus its total equity. This equation can only be maintained if all transactions are entered on both sides of the equation, hence each transaction must be entered as a debit to one account and a credit to another. This is the principle behind the trial balance.
As all transactions must have a debit and a credit, provided that all entries in both the journal and the general ledger are correct, then the sum of all the debit balances should be equal to the sum of all the credit balances. This sum is called the trial balance. However, if the debit and credit balances are not equal, then the trial balance will not be in balance, indicating that there has been a recording or transcribing error somewhere in the accounting process.
It is important to note that the trial balance will only detect errors in double entry bookkeeping, including stating the wrong amount in one account, or putting a debit in a credit column by mistake. It does not indicate errors in the interpretation of transactions or in the transcribing on a whole transaction. For example, a transaction which has been completely omitted from the journal and / or the general ledger would not cause an error in the trial balance. Similarly, a transaction where one or both of the debit and credit were recorded in the wrong account would not cause an error, nor would debiting the account which should be credited and vice versa. As such, the source documents should be used to verify all information in the journals and general ledger, and the trial balance should not be relied upon as a complete check for errors.
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Of course, if the trial balance does not balance, then it will be clear that an error has occurred somewhere during the accounting process. In this case, the accountants will need to check back through the journal entries and the general ledger to determine where the error is and how it can be corrected. However, errors in the trial balance are usually caused by a relatively limited number of common errors, and checking the list of errors can help in determining the cause of any errors. The most common errors are:
- Incorrectly adding the debit and / or credit balances
- Incorrectly transferring the balances of the ledger accounts to the trial balance columns, either through incorrect transcription of a number; transferring a debit or credit balance to the wrong column; or completely missing out a ledger account
- Incorrectly calculating the balance of one of the ledger accounts
- Incorrectly transferring a journal entry to the ledger. Again, this can be a numerical error, a debit or credit posted to the wrong column, or omitting one side of an entry. Remember that omitting an entire entry would affect both debit and credit balances, hence the trial balance would still be in balance.
- Incorrectly entering a transaction into the journal: again, either making a numerical error or omitting part of a transaction
Whilst this list can make it difficult to find any errors, the trial balance is often prepared on a regular basis throughout the accounting cycle, perhaps once a week or once a month. This makes it easier to determine the source of any error, as any mistake will be in the transactions entered since the last time the trial balance was in balance. In addition, the use of accounting software to prepare the general ledger accounts makes preparing the trial balance and identifying any errors a quicker and easier process.