Trial Balance: 6 important things to know

The Trial Balance is the 4^th step in the Accounting Cycle. It is the nail-biting moment for students of accounting. It tells you a lot about your performance thus far, and can leave you feeling frustrated or relieved when you’re done.

Writing up a Trial Balance is very simple. It is the borderline between the bookkeeper’s job and the accountant’s job. Here are 6 important things to know about the Trial Balance.

6 important things to know about the Trial Balance

1. Balances come from the Ledgers and Cash Book

So, we are aware that there are only 3 types of Ledgers, but guess what? The Cash Book is also a subsidiary ledger when no Cash and Bank accounts are present in the General Ledger.

In other words, if there is a Cash Book, it serves as a book of original entry and the balances of the Cash and Bank columns go to the Trial Balance. If, however, there is no Cash Book, then all balances come from the General Ledger, Sales Ledger and Purchases Ledger.

2. A balanced Trial Balance means correct mathematics

Seeing a balanced Trial Balance feels like the moment you have been waiting for. It means that your calculations are accurate.

Accounting students like to take a break when this happens because it feels like something great have been accomplished. This could mean that you are ready to move on to the 5^th step of the Accounting Cycle or it could mean other things.

3. A balanced Trial Balance does not mean no errors

Here comes the rain to fall on your parade! A balanced Trial Balance does not mean that there are no errors in your Ledgers. It simply means that your debits and credits match, not that they are correct.

When you check your work for accuracy, you would be surprised to find out that there are 6 different types of errors that are not revealed by the Trial Balance.

Errors that do not affect the Trial Balance

Error of Commission – correct amount, wrong account

Error of Omission – both entries are not recorded

Error of Principle – correct amount, wrong type of account

Error of Original Entry – correct account, wrong amount

Complete Reversal of Entries – correct account and amount, wrong sides of the account

Compensating Errors – two or more error that are not related cancel out each other

4. Folio column keeps all accounts in check

Even though you’ve learned to ignore the Folio column when doing basic accounting, it’s actually a very important part of keeping track of your books. Every account has a tag that connects it to the first or second book of entry.

After posting the accounts to the Journals and leaving the Folio column empty, there are 3 steps to posting to the Folio column that you should know. For simplicity, the number 1 is used for page numbers and account numbers, but know that these can be any number.

1. You must label the Folio column in the Ledger accounts

Start labelling the Folio column in each Ledger account with the Journal’s name and page number from which it came.

Book and page number – Folio name

General Journal Page 1 – GJ 1

Cash Book Page 1 – CB 1

Sales Journal Page 1 – SJ 1

Purchases Journal Page 1 – PJ 1

Returns Inwards Journal Page 1 – RIJ 1

Returns Outwards Journal Page 1 – ROJ 1

2. You must label the Folio column in the Journals

Go back to the Journal and label each account with the Ledger’s name and account number in which it was recorded.

Ledger and account number – Folio name

General Ledger Account 1 – GL 1

Sales Ledger Account 1 – SL 1

Purchases Ledger Account 1 – PL 1

3. You must label the Folio column in the Trial Balance

Use the Folio numbers in the Ledgers and Cash Book to fill the column in the Trial Balance. The Cash Book only has 2 accounts which are Cash and Bank totals. They are either listed separately or totalled on the Trial Balance.

Ledger/Cash Book and account number – Folio name

General Ledger Account 1 – GL 1

Sales Ledger Account 1 – SL 1

Purchases Ledger Account 1 – PL 1

Cash Book Page 1 – CB 1

5. Know which accounts are debited and credited

Before you even start to do Journals, you should already know which accounts have debit and credit balances. However, there are many students who are still confused about this right down to doing a Trial Balance.

When you post accounts to the wrong side of the Ledger account, the Trial Balance will be off on one side. Here is an easy way to remember which accounts are debited and credited.

Debit Assets and Expenses

Credit Liabilities, Income and Capital

6. Know which accounts go the Income Statement and Balance Sheet

The final thing you should know about a Trial Balance is which accounts go to the Income Statement and Balance Sheet.

As you’ve completed the list of all the balances of assets, liabilities, income, capital and expenses, it is time to split them up into the correct Financial Statements.

Here is an easy way to remember which accounts go to the Income Statement and Balance Sheet.

Income Statement carries Income and Expenses

Balance Sheet carries Liabilities, Income and Capital

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See also:

ALICE: Assets, Liabilities, Income, Capital, Expenses

Accounting Cycle: Complete basic accounting in 8 steps

Goods for resale: Stock, Purchases, Sales, Carriages and Returns

Debit and Credit: Simple view of in and out

Increase and decrease of ALICE accounts

Expenses: Spending that’s direct, indirect, operating and non-operating

Income: Earned, unearned and contributed money

Cash Book: How to record cash, bank and discounts

Journals: Complete 7 Day Books with 4 types of transactions

Ledger accounts: Simple breakdown of Types, Format, Double Entry, Balance

Liabilities: Owed long and short-term items with a credit balance

Capital: Invested assets and the liquidity of a business