Trial balance - a valuable tool in the arsenal of the accounting method

The accounting tool with which the above obligations can be realised is the trial balance. That is why it is useful in this article to explore in detail the trial balance, what it is, what its role is and why it is important for accounting. We will look at the process of preparing a trial balance and the types of trial balances that are used in a company's accounts. We will also discuss some common problems and possible mistakes in the trial balance process and how they can be avoided.

This article aims to provide as detailed an understanding of the trial balance as possible, which is useful for both experienced accountants and contractors or a company's specialist staff. This information and knowledge on the subject can be useful even if one adopts a cautious attitude by hiring accounting services or outsourcing the work to specialised accounting and financial and tax reporting companies that have extensive experience and can ensure rigorous reporting in the services provided.

Contents

1. What is the trial balance - definition and overview of the accounting tool

2. The trial balance and the model for its preparation in the case of a company

3. How to read a trial balance and when to draw up the trial balance to discover errors using this valuable tool

1. What is the trial balance - definition and overview of the accounting tool

From an accounting point of view, the trial balance is part of the inventory of accounting methods required firstly to ensure the accuracy of the recording of commercial transactions in the accounting accounts, and secondly to ensure the link between the summary accounts, the balance sheet and the analytical accounts. The trial balance also acts as a genuine centraliser or mirror of accounting operations.

From this brief definition, however, it is possible to deduce some elements that may constitute what are known in the literature as the functions of the trial balance.

• Thus, the first function of the trial balance is to guarantee the accuracy of the accounting entries in the accounts. The trial balance is used to check the correct recording of all commercial transactions and to easily identify any errors that may occur, especially due to failure to comply with the principle of double entry.

Thus, any erroneous data entered in the Journal Register, in the General Ledger Register and within these records in the balance may result in erroneous transactions and balances that do not reflect reality. Thus, inequalities appear between the total amounts of the balance - a fact that is a signal of the existence of some errors, either in registration or in the calculation of the accounting formulas, errors that must then be individualized and corrected.

• A second function of the trial balance is to provide the link between the synthetic accounts and the entity's balance sheet. This function is performed by gathering all data from all ledger accounts and totaling their final balances, totals that are used as primary information in the balance sheet alongside the opening balances of the accounts used in the annual balance sheets.
• Another function of the trial balance is that of a link between synthetic and analytical accounts. With the help of the verification balance, the correspondence between the information entered in the synthetic and analytical accounts was ensured.
• An important function of the trial balance is to be a valuable tool for analyzing the financial and economic situation of a company at any time. Of course, the balance sheet remains the essential element in the field of this type of analysis, but this accounting tool can only be accessed annually, at the end of an accounting cycle of activity. Between two consecutive annual balance sheets, the trial balance - which can be drawn up monthly, quarterly, semi-annually, annually or whenever needed - remains the operational tool that companies' management can call upon to have a snapshot of the company's situation even if the information provided is somewhat more limited than that provided by the balance sheets.

• Finally, a final basic function of the trial balance relates to the knowledge of the patrimonial evolution of the economic entity. By means of the trial balance and the centralization of the data that this accounting tool offers, it is possible to obtain an overview of the movements made regarding the patrimonial elements of an entity (changes in volume, structure and those regarding financial results obtained from the activity).

2. The trial balance and the model for its preparation in the case of a company

The preparation of trial balances depends on the type of these accounting instruments. Thus, depending on the accounts they contain, trial balances can be synthetic and analytical.

• Preparation of the trial balance in the case of synthetic accounts

The trial balance of the synthetic accounts is made starting from the accounting information found in the synthetic accounts that the entity uses in managing the accounting activity in a certain period of time (also called the management period). Thus, when drawing up this type of trial balance, a series of operations will be carried out as follows:

• The debit and credit turnovers of each synthetic account will be established;
• The verification balance will be successively completed with the following information: initial balances, debit and credit turnovers of the current month taken from the General Ledger, the calculated total of credit and debit amounts;
• The final balances are determined by calculating the difference between the total debit amounts and the total credit amounts for each synthetic account;
• Calculate the totals on each column and compare and check for equality between paired columns.
• Preparation of the trial balance in the case of analytical accounts

Unlike synthetic trial balances, these types of trial balances are also drawn up for synthetic accounts, but only for those whose records are maintained through analytical accounts. There is the possibility that for a single synthetic account, its records are carried out on several analytical accounts, for each of which it is possible to draw up a trial balance that can contain both value and quantitative information.

Trial balances of analytical accounts ensure the control of the accuracy of records and equality between:

• the total of the initial balances of each analytical account with the initial balance of the synthetic account,
• the total turnover of the analytical accounts with the debit turnover of the synthetic account,
• the total of the credit turnover of the analytical accounts and the credit turnover of the synthetic account, and finally
• the total of the final balances of the analytical accounts with the final balance of the synthetic account

Please note that in the opening balances and closing balances mentioned above, the totals will refer to both debits and credits.

Verification balances can also differ from each other according to the number of equalities they integrate. Thus, the preparation of the verification balances according to this criterion can be done as follows:

• The preparation of the single-equity trial balance must be completed by verifying either the totals or the balances. Thus, the total debit amounts must equal the total credit amounts, and in the second case listed, the total debit ending balances must equal the total credit ending balances.
• In the case of trial balances with two equalities, four columns will be drawn up because this type of balance practically combines the balance of total amounts with the balance of balances. Thus, two columns are dedicated to debit and credit amounts, and two other columns are reserved for final balances (which, in turn, are debit and credit).
• Three-equal trial balances are useful tools that provide additional information over two-equal trial balances. In addition to the mentioned equalities, the equality between debit turnovers and credit turnovers is introduced. Thus, the trial balance with three equals is represented in tabular form with six columns. But, through this method, although the total value of the economic activity can be verified, no information is provided about the type and nature of the operations that make up this activity.

This is why a form of check balance with three ties called the "chess check balance" can be used. The name comes from the fact that the preparation of this type of balance is done according to the shape of a chessboard. Although the same three equalities are obtained, they are no longer reflected at the end of paired columns, being found at the points of intersection of rows with columns. In this way, correspondence can be made between the turnovers of the current period registered on each corresponding account, thus finding out details about the economic operations carried out and their content.

When drawing up trial balances with four equalities, the previous amounts taken from a previously completed balance will be taken into account. Thus, the trial balance with four equalities will include four pairs of columns, respectively:

• total debit amounts taken from the previous balance = total credit amounts from the previous balance;
• total debit turnovers for the current month = total credit turnovers for the current month;
• total debtor amounts at the date of preparation = total creditor amounts at the date of preparation;
• total final debit balances = total final credit balances.

However, even the balance sheet with four equals does not present absolutely all the information that might be needed. Thus, the turnover of the accounts from the previous months do not appear in this way of drawing up the balance. The remedy might be to use a five-equal trial balance.

3. How to read a trial balance and when to draw up the balance sheet to discover errors with this valuable tool

Trial balances are useful tools in the field of accounting and financial and tax reporting and have a particularly important role in identifying and correcting a series of accounting recording errors that may occur throughout the specific activity of an economic entity. Of course, turning to professionals in the field of financial audit and tax advisory services is a prudent and recommended path to follow for most companies, especially for those that carry out numerous and large-scale economic operations in multiple fields. But, using the check balance remains, in this case, a useful way to detect the following types of errors in time:

• Mistakes in determining the amounts from the various accounting formulas used;
• Errors when recording information in the systematic accounting records and which may appear in the transfer of erroneous amounts from the Journal Register to the General Ledger Register;
• Mistakes arising from wrong calculations when determining turnovers, total amounts and accounting account balances;
• Failure to register some economic operations in the company's accounting;
• Errors arising as a result of transcribing correct amounts but in other accounts than those in which they should have been entered according to the correspondence of the economic essence of the respective operation;
• Errors when recording in the chronological record can appear for various reasons, among which can be mentioned: inversions of accounting formulas, accounting formulas used correctly but with erroneous amounts, repeated registration of an economic operation, and wrong correspondence between two accounts.

All these errors cause inequalities to appear in the paired columns of the trial balance and can thus be quickly identified and addressed. However, it should be noted that modern accounting services, together with the use of modern IT hardware infrastructure and high-performance accounting software, reduce to the point of elimination the possibility of the appearance of most of these errors, the trial balance still remains a useful informative tool intended for various actors within of the entity for the realization of momentary "photographs" of its economic-financial evolution.

Therefore, the importance of the trial balance in the management of the accounting activity of companies remains an essential one and imposed by the legislation in the field for compliance with the accounting method and the accuracy of the records made.

*This material has been prepared for informational purposes only and is not intended to provide tax, legal or accounting advice. We recommend that you consult with our team of tax, legal and accounting advisors before making any decisions regarding the topics mentioned in this article.