If you're thinking of ditching your current accounting software or don't feel compelled to pay a bookkeeper to do data entry, one of the most important things you're going to need is your trial balance. Let's talk about what that is, why it matters and what it's used for.
What is a Trial Balance Used For?
The trial balance is a type of financial report that is generated at the end of an accounting period, prior to the creation of your financial statements. Its main purpose is to allow you to catch any accounting errors and then make any necessary adjustments,so that your financial statements are completely accurate. You'll want to be sure to catch the errors at this stage: going back and making fixes once your statements are already generated just creates extra work!
Balancing Debits and Credits
The trial balance will include the ending balances of your general ledger accounts, with debit balances recorded in one column and credit balances in another. Any accounts with zero balances at the end of the accounting period in question would be omitted.
In double-entry bookkeeping, the total sum of debits should equal the total sum of credits. If you end up with an imbalance between debits and credits in your trial balance, then you know something's gone wrong. It could be a question of a missing debit or credit entry, or an amount copied over incorrectly from a general ledger account.
Be warned, though: just because your debits and credits work out to be equal in your trial balance, that's not a guarantee the report is error-free. If an incorrect debit entry is offset by an equivalent incorrect credit, then the mistake won't be immediately obvious. Always double and triple check your math to see if any errors slipped by.
Unadjusted vs. Adjusted Trial Balance
Once you've compiled all of your ending account balances and sorted them by debits and credits, this is known as the unadjusted trial balance. As mentioned above, you'll need to check for any errors at this stage, and see what adjustments need to be made. After you've made your adjustments, you now have your adjusted trial balance.
Auditors may be interested in comparing the unadjusted trial balance with the adjusted version. The two reports offer insight into how the financial statements were prepared and show whether the business is in compliance with certain accounting standards, like GAAP.
How Cloud Accounting Software Drastically Simplifies Trial Balance Work
With the right cloud accounting software, you no longer need to worry about manually compiling trial balances when it comes time to generate your financial statements. However, as we said at the beginning of this post, importing your trial balance into new accounting software should be your first step to making the switch to clean, efficient business bookkeeping. So if you're thinking of making the switch, make sure you're on solid footing with your trial balance first!