Accountancy
Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Auditing
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax
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A trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.

The name comes from the purpose of a trial balance which is to prove that that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a businesses performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.

The trial balance is usually prepared by a bookkeeper who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.

[edit] Trial balance limitations

A balanced trial balance does not guarantee that there are no errors. The following are the main classes of error that are not detected by the trial balance:

• An error of original entry is when both sides of a transaction include the wrong amount.^[1] For example, if a purchase invoice for £21 is entered as £12, this will result in an incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor account), both for £9 less, so the total of both columns will be £9 less, and will thus balance.
• An error of omission is when a transaction is completely omitted from the accounting records.^[1] As the debits and credits for the transaction would balance, omitting it would still leave the totals balanced. A variation of this error is omitting one of the ledger account totals from the trial balance.^[2]
• An error of reversal is when entries are made to the correct amount, but with debits instead of credits, and vice versa.^[1] For example, if a cash sale for £100 is debited to the Sales account, and credited to the Cash account. Such an error will not affect the totals.
• An error of commission is when the entries are made at the correct amount, and the appropriate side (debit or credit), but one or more entries are made to the wrong account of the correct type.^[1] For example, if fuel costs are incorrectly debited to the postage account (both expense accounts). This will not affect the totals.
• An error of principle is when the entries are made to the correct amount, and the appropriate side (debit or credit), as with an error of commission, but the wrong type of account is used.^[1] For example, if fuel costs (an expense account), are debited to stock (an asset account). This will not affect the totals.
• Compensating errors are multiple unrelated errors that would individually lead to an imbalance, but together cancel each other out.^[1]
• A Transposition Error is a Computing error caused by switching the position of two adjacent digits. Since the resulting error is always divisible by 9, accountants use this fact to locate the misentered number. For example, a total is off by 72, dividing it by 9 gives 8 which indicates that one of the switched digit is either more, or less, by 8 than the other digit. Hence the error was caused by switching the digits 8 and 0 or 1 and 9. This will also not affect the totals.

[edit] References