One of the greatest benefits of using a double-entry accounting system is the capability to generate a trial balance. What do we mean by trial balance? As the name suggests a trial balance is a report that must have its debits equals to credits. Understand the importance of trial balance and why it is balanced. Learn how it is prepared and in which format.
In the preceding tutorials, we illustrated the rules of debit and credit for recording transactions in accounts using journal entries. We also discussed the accounting equation and established that, in doing so, the sum of the debits is always equal to the sum of the credits for each journal entry. This equality of debits and credits for each transaction is built into the accounting equation and because of this double equality; this system of recording transactions is called the double-entry accounting system. In the double-entry accounting system, each accounting entry results in two nominal accounts being debited and credited with equal amounts.
The practice of recording the same debit amount to one account and an equal credit amount to another account results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances (Debit Balances) will be equal to the aggregate balance of all accounts having negative balances (Credit Balances). Trial Balance is the compilation of balances of all accounts in the general ledgers into debit and credit columns. In a double-entry accounting system the total debits equal the total credits hence a compilation of all the accounts will be balanced, that is Sum of Debits will be equal to the sum of credits and hence the sum of the trial balance will always be zero if debit balances are represented by positive amounts and credit balances are represented by negative amounts.
The first step to prepare a trial balance is to extract the account balances from each account in the general ledger in a columnar form. Thus, before the trial balance can be prepared, each account balance in the ledger must be determined. When the standard account form is used, the balance of each account appears in the balance column on the same line as the last posting to the account. The next step is to calculate the debits and then the credits in the respective columns. In short, the trial balance procedure involves five steps:
All automated accounting systems and ERPs come with trial balance as a standard report and it can be generated for each accounting period.
The important concept to understand is that a trial balance is a statement, not an account. It is the extraction of all balances from all accounts in a general ledger. It is valid for a particular date. It is always prepared with reference to an accounting period with reference to a particular date. Trial Balance is true for the date for which it has been drawn. The traditional format of trial balance includes the following columns:
Because of the volume of data manipulated when bookkeeping, errors are easy to make, since numbers are constantly being added or subtracted. How can users be sure that they have not made an error in posting the debits and credits to the ledger? One way is to determine the equality of the debits and credits in the ledger. A trial balance checks the equality of the debits and credits. Taking a trial balance is done after posting to the ledger, but can also be performed throughout accounting activities. This equality should be proved at the end of each accounting period, if not more often.
The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. If the balances equal in a trial balance, there still may be an error. Errors can easily be made because numbers are transferred so many times. During accounting activities, wrong amounts can be recorded, numbers transposed, and amounts debited instead of credited. Sometimes errors occur without affecting the balance.
If the two totals of a trial balance are not equal, an error has occurred. If the trial balance shows that the debits do not equal the credits, then another trial balance should be taken. If the debits still do not equal the credits, then an error exists and must be found.
There exist some techniques that are used by the accountants to locate the errors if the trial balance has resulted in unequal amounts. Some tips are given below:
Bookkeeping is the act of recording transactions, while accounting includes bookkeeping activities plus the preparation, analysis, and interpretation of financial information. Once we have recorded the transactions, the next step is to convert this data into meaningful information that can provide insights to the business stakeholders.
Trial Balance is usually drawn at the end of every reporting period. Trial Balance becomes the basis for advanced reports like Balance Sheet and Profit and Loss Accounts. The concept of “Balancing” and “Suspense Posting” ensures that Journals in an automated system and ERPs are always balanced resulting in a balanced trial balance. Trial Balance is used for financial reporting, management reporting, consolidation process, and reconciliation processes.
Operational Structures in Business
Large organizations grow through subsidiaries, joint ventures, multiple divisions and departments along with mergers and acquisitions. Leaders of these organizations typically want to analyze the business based on operational structures such as industries, functions, consumers, or product lines.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. A joint venture takes place when two or more parties come together to take on one project.
GL - Accrued / Unbilled Revenue
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. Understand what we mean by the terms accrued revenue, accrued assets, and unbilled revenue. Explore the business conditions that require recognition of accrued revenue in the books of accounts and some industries where this practice is prevalent.
For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts.
Different Types of Organizational Structures
Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.
In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.
What is a Business Eco System?
The goal of a business is to generate capital appreciation and profits for its owners or stakeholders by engaging in provision of goods and services to customers within the eco system/framework governed by respective laws(local/international). The eco system involves various entities that the business works with for delivery of a product or service.
GL - Journal Posting and Balances
In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
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