To produce a trial balance a firm must operate a double entry system with debit and credits and a general/nominal ledger. A trial balance can be performed at any stage, but normally at the end of given accounting period. Since a double entry system records a debit and credit for every transaction then if there have been no mistakes in this procedure then adding up all the debits on one side and credits on the other side should give the same figure. This is a trial balance (Investopedia).
The benefits of a trial balance are it shows that the debit and credit entries mirror each other and no simple mathematical errors have been made. This is an important start to producing accurate accounting records. However, there are limitations. The trial balance does not show that the entries made are correct it just shows they mirror each other. For example, a mistake in a cash expense entry being shown as £1000 (debit expenses and credit bank) that should have been £100, will still balance, but be incorrect. Also, errors of commission (added by mistake or fraudulently) or omission (left out by mistake or fraudulently) will not be shown by the trial balance. Another disadvantage for very small firms is that running a double entry system can be confusing and add to administrative costs.
In conclusion, a trial balance is a helpful step in compiling accounts, but other checks and measures are needed to ensure accuracy.
Lew
Developer of Business Plan Quick Builder and BizzLink
Notes
- Inspired by our response to Quora question
- Photo by Scott Graham on Unsplash
