Trial balance: definition, importance, and foundations of preparation in accounting

Some accounting errors committed by the financial accountant are repeated during the preparation of the company's financial statements, so it is necessary to ensure the accuracy and correctness of the data recorded in the journal or ledger periodically to ensure the correctness of the company's accounting operations. Hence, the importance of the trial balance as a main tool that helps in reviewing and verifying financial statements. The following is the definition of the trial balance and its different types, in addition to its main objective, and its great importance in preparing accounting operations at the end of the financial period, with an explanation of the method of preparing the trial balance.

Definition of trial balance
trial balance is a table that collects the debit balances and credit balances of accounts and checks the balance of each balance. The trial balance is usually at the end of the accounting period, as the debit side must be equal to the credit side in the accounts, and this is one of the basic steps in the accounting cycle. Ledger accounts are used as a basis for recording data in the trial balance, so it's important to regularly audit the ledger accounts to make sure they're free of errors. The trial balance is at the conclusion of the accounting period after the close of the ledger.

The importance of the trial balance

The trial balance is of great importance in the preparation of various accounting operations, and can be summarized in the following points:

  • This contributes to the detection of accounting errors that may occur in the journal or ledger.

  • Helps in compiling and summarizing all financial operations that took place during the specified accounting period.

  • The trial balance is the basis for the preparation of final accounts, through which the various balances are collected and transferred to the final accounts.

  • Used to verify the accuracy of financial statements transferred from the ledger to the trial balance, and then to the balance sheet account.

  • Most importantly, it helps ensure the correctness and accuracy of the company's accounts, ensuring the correctness of the data recorded in the accounting books.

Objective of preparing the trial balance
There are several main objectives for creating the trial balance, the most important of which are:

  • Assist in the preparation of financial statements at the end of the accounting period, where the final balances of income and expenses are carried over from the trial balance to the income statement, and the accounts of assets and liabilities are carried over to the accounts of the financial position.

  • Detect errors that may appear as a result of recording daily entries incorrectly, which leads to an imbalance of balances in the trial balance.

  • Facilitate the accountant in summarizing all financial transactions accurately and easily, without the need to refer to the original accounting records.

Components
Of the trial balance, the components of the trial balance consist of the following basic elements:

  • Account balances are used to display the final balances of each account, whether debit balances or credit balances.

  • Account names include all accounts of liabilities, assets, revenues, expenses, and other accounts recorded in the general ledger.

  • Total Receivables represent the total credit balances of the company, which is the amount that the company is entitled to receive.

  • Total debt refers to the total debit balances of the company, i.e. the total amount of money owed by the company.

 

Types of trial balance
The following are the most important types of trial balance:

  • The trial balance in balances (in numbers) 
    is an accounting report prepared after the completion of the process of crediting accounts in the ledger. This balance includes the posted or transferred balances of each account, and is mainly intended to ensure the correctness of the balance process and the balance of balances in the ledger.

  • The total trial balance
    is an accounting report prepared at a specific time, and most importantly, it is used to clarify the sum of the credit side, and the debit side of all accounts, whether accounts for assets, revenues, expenses and other accounts in the ledger, except for the balance of the posted account.

  • Full trial balance (in totals and balances)
    The full balance of the audit is conducted with balances and totals, and all accounts are clarified during a specific accounting period, and the difference between the credit and debit balances is taken in the trial balance in totals, and we work to put the difference in the trial balance in balances.

 

 

Common errors in the trial balance
There are several common errors that may appear in the trial balance, including the following:

  • Equivalent errors
    Are errors that occur when balances are recorded incorrectly but by the same amount on both sides of the balance, making the balance balanced despite the presence of the error. For example, recording SAR 4,000 instead of SAR 40,000, which is an error that does not affect the balance of the trial balance.

  • Omission errors
    These errors occur when a particular accounting entry is completely omitted, resulting in incorrect or incomplete balances.

  • Repeat transaction recording
    Is the error caused by miscopying numbers or entries from one book to another, resulting in the operation being recorded two or more times?

  • Technical errors
    These errors arise when the amounts are wrongly recorded on the correct side of the account, or when the balance is not carried over from side to side, whether it is the creditor or the debtor.

  • Human errors
    Result from incorrect account balances being entered into the ledger, which in turn leads to incorrect data being transferred to the trial balance.

  • Timing errors
    These errors arise due to the recording of financial operations in the wrong time period or the incorrect combination of the debtor and creditor sides, resulting in a difference in the total and an imbalance of the trial balance.

 

The trial balance is a pivotal tool in the accounting system of any entity, as it contributes to ensuring the accuracy and balance of financial accounts. By pooling debit and credit balances, an accountant can validate accounting entries and detect potential misstatements before preparing final financial statements. However, it should be noted that the balance of the trial balance does not necessarily mean that the records are free of errors, as there may be errors that do not affect the balance, such as equivalent errors or errors resulting from omissions. Therefore, it is advisable to carry out a careful periodic review of accounting books and use advanced accounting programs to facilitate the process of preparing the balance and detecting errors at early stages. Preparing the trial balance is an essential step towards preparing accurate and reliable financial statements, which enhances the transparency of financial operations and helps in making sound financial decisions.