How to prepare trial balance

The Trial Balance is, as the name suggests, a table where we lay out all our debit accounts and all our credit accounts to see if they balance or not.

A trial balance is important because it acts as a summary of all of our accounts. By looking at our trial balance we can immediately see our bank balance, our loan balance, our owner’s equity balance. In fact, we can immediately see the balance of every single account in our business.

Why is this important?

Well, as you know, accounting is all about balancing. The accounting equation needs to balance, every transaction needs to be balanced, our debits and credits need to be balanced and so on.

A trial balance is basically the accounting equation of our business laid out in detail. It has our assets, expenses and drawings on the left (the debit side) and our liabilities, revenue and owner’s equity on the right (the credit side). We can see everything clearly and make sure it all balances.

A trial balance that balances tells us that we’ve done all our journals and ledgers correctly. Basically, it’s saying, “All your transactions for the year have been entered and everything looks right!”

As you may have already guessed, in the real world trial balances do not always balance the first time. As with anything, human errors will occur and somewhere along the line someone is likely to have entered a bad journal or processed a ledger incorrectly. Therefore at the trial balance stage accountants and bookkeepers are often forced to go back and review vouchers, journals and ledgers to locate the errors and bring the accounts back to balance. This shows the importance of producing a trial balance in the first place – it tells the user that the accounting equation is out of balance and it needs to be fixed before going any further.

Producing the trial balance is the final step of data processing – after that, we can start producing our financial statements!

So how is our trial balance prepared?

First of all, we take all the balances from our ledgers and enter them into our trial balance table. Remember the accounting equation:

DEBIT SIDE	CREDIT SIDE
Assets + Expenses + Drawings	Liabilities + Revenue + Owners Equity

Below is a list of all of our balances from our ledgers. You have calculated these balances in Lesson 8. Now you need to place them on the trial balance to see if they fit into the accounting equation! 

Credit Side	Debit Side
Assets Bank  $21,650 Computer    $1,500 Car   $3,000 iPhone $500 Oven $2000	Liabilities Loan    $9,000 John’s Car Shop    $3,000 Accumulated depreciation $400 Add your items here Add your items here
Expenses Cake mix  $3,000 Interest expense   $1,000 Telephone expense   $300 Repairs expense  $50 Depreciation $400	Revenue Sales   $7,000 Add your items here Add your items here Add your items here Add your items here
Drawings Drawings   $1,000	Owners’ Equity Owner’s Equity     $15,000

Total Balance

Total Balance

Wow. You’ve just balanced your first trial balance. We now know that all our numbers are correct, and can start compiling financial statements! Go take a break and celebrate with a bowl of fries and a chocolate milkshake. You deserve it!