The trial balance
In the first module of the course, financial reporting was defined as the process of recording, classifying, summarising, reporting, and analysing financial information. The previous modules covered recording and classifying transactions in the books of prime entry and posting them to the general ledger. Once that’s done, the ledger balances are summarised in a trial balance.
This chapter looks at the purpose of a trial balance, how to extract one from the general ledger (including an opening trial balance), and the types of error it can’t reveal. Correcting errors is covered in a later chapter.
Learning objectives
By the end of this chapter, you should be able to:
- Describe the purpose of a trial balance.
- Extract general ledger balances into a trial balance.
- Prepare extracts of an opening trial balance.
- Explain the limitations of a trial balance.
The trial balance can reveal some errors made when transactions were posted to the ledger accounts, but as you’ll see later in this chapter, it can’t reveal all of them.
When and how is the trial balance prepared?
You prepare a trial balance after all general ledger accounts have been balanced off.
Once each general ledger account is balanced, the closing balance is carried down (c/d) on the side needed to make debits equal credits, then brought down (b/d) on the opposite side as the opening balance for the next period. It’s the balance c/d - the closing balance - that’s transferred to the trial balance:
- All debit balances are recorded on the debit side of the trial balance.
- All credit balances are recorded on the credit side.
Note: All things being equal, the closing balance of each general ledger account should reflect the normal balance of its corresponding element of the financial statement. For instance, the receivables account should have a debit balance because it represents an asset, and assets normally carry debit balances. However, in practice, some accounts may occasionally deviate from this rule depending on the transactions recorded in them. For example, a bank account that is overdrawn has a credit balance, so it appears on the credit side.
Illustration: Extracting trial balance
A sole trader started a business with $50,000 cash. During January 2024, the following transactions occurred:
- Bought goods for cash, $15,000.
- Purchased goods on credit from Kofi & Sons, $10,000.
- Sold goods for cash $12,000.
- Sold goods on credit to Ama Ltd., $8,000.
- Paid rent by cash $2,000.
- Paid Kofi & Sons $6,000 by cash.
- Received $5,000 from Ama Ltd.
Required:
(a) Prepare the general ledger accounts to record the above transactions. (b) Extract the trial balance of the sole trader as at 31st January 2024.
Suggested solution:
See below the journal entries as well as the general ledger accounts.
| Journal entries | DR ($) | CR ($) |
|---|---|---|
| Owner introduced capital: | ||
| Cash/Bank | 50,000 | |
| Capital | 50,000 | |
| Bought goods for cash | ||
| Purchases | 15,000 | |
| Cash/Bank | 15,000 | |
| Purchased goods on credit from Kofi & Sons | ||
| Purchases | 10,000 | |
| Payables | 10,000 | |
| Sold goods for cash | ||
| Cash/Bank | 12,000 | |
| Sales | 12,000 | |
| Sold goods on credit to Ama Ltd. | ||
| Receivables | 8,000 | |
| Sales | 8,000 | |
| Paid rent by cash | ||
| Rent expense | 2,000 | |
| Cash/Bank | 2,000 | |
| Paid Kofi & Sons by cash | ||
| Payables | 6,000 | |
| Cash/Bank | 6,000 | |
| Received payment from Ama Ltd. | ||
| Cash/Bank | 5,000 | |
| Receivables | 5,000 |
Below are the balanced general ledger accounts following the extraction from the journal entries above.
Once the general ledger accounts have been prepared and balanced off, the trial balance can be extracted. See the trial balance below.
| Trial balance as at 31st January 2024 | ||
|---|---|---|
| Dr | Cr | |
| $ | $ | |
| Cash and bank | 44,000 | |
| Purchases | 25,000 | |
| Receivables | 3,000 | |
| Rent | 2,000 | |
| Capital | 50,000 | |
| Sales | 20,000 | |
| Payables | 4,000 | |
| 74,000 | 74,000 |
Notes:
- Equal totals show only that the double entry is arithmetically consistent. Some errors still leave the trial balance balanced (see Limitations of a trial balance below).
- If the totals differ, an error has been made somewhere in posting, balancing, or extracting the ledger balances, and it must be investigated and corrected.
The opening trial balance
At the start of a new accounting period, only the asset, liability and capital balances carry forward from the general ledger - these are the statement of financial position items. Income and expense accounts, such as sales, purchases and rent, are closed off to the statement of profit or loss at the end of the period, and the resulting profit or loss is added to (or deducted from) capital. So an opening trial balance for a new period never contains income or expense balances.
Example: Opening trial balance
Using the sole trader’s balances above, the statement of profit or loss for January 2024 (assuming all the goods were sold, so there’s no closing inventory and cost of sales equals purchases) shows sales of $20,000 less purchases of $25,000 and rent of $2,000, a loss of $7,000 for the month. This loss reduces capital from $50,000 to $43,000. Carrying forward the asset, liability and capital balances as at 31 January 2024 gives the following opening trial balance as at 1 February 2024:
Opening trial balance as at 1st February 2024 Dr ($) Cr ($) Cash and bank 44,000 Receivables 3,000 Payables 4,000 Capital 43,000 47,000 47,000 Answer: The opening trial balance balances at $47,000 on each side. Notice that purchases, sales and rent - income and expense accounts - don’t appear; only the statement of financial position items carry forward.
Limitations of a trial balance
A trial balance confirms that total debits equal total credits, but it can’t confirm that the entries behind those balances were correct, complete, or properly classified. Several types of error leave the trial balance balanced:
- Omission: a transaction is left out of the books entirely, so neither a debit nor a credit is recorded (e.g., a cash sale is never recorded).
- Commission: an entry is posted to the wrong account of the same type (e.g., a payment is debited to the wrong customer’s receivables account).
- Principle: an entry is posted to the wrong type of account (e.g., the cost of a non-current asset is debited to an expense account instead of being capitalised).
- Original entry: the wrong amount is entered, but the same wrong amount appears on both the debit and the credit side (e.g., a $450 purchase is recorded as $540 in both the purchases and payables accounts).
- Complete reversal: the debit and credit entries are swapped (e.g., a payment to a supplier is debited to cash and bank and credited to payables, the reverse of the correct entry).
- Compensating: two unrelated errors of equal amounts happen to cancel each other out.
By contrast, a trial balance will reveal a difference where only one side of an entry has been posted, where a transposition error (e.g., $540 posted as $450) happens on only one side, or where unequal debit and credit amounts are recorded.
How to find and correct these errors is covered in the Correction of errors and Suspense accounts chapters.