TRIAL BALANCE Explained (with a Full Example!) | Accounting Basics

[Music] In today’s video we’re going to build ourselves
a Trial Balance like this one… [Music] Hey guys, my name’s James and welcome back to another episode of Accounting Stuff.
Today’s video is number five of Accounting Basics and it’s all about the Trial Balance.
I’m going to explain what it means, why it exists, and show you how to make one for
yourself. Are you ready?
Let’s do this! A Trial Balance, or “TB” when abbreviated,
is is an Accounting Report showing the Closing Balances of all General Ledger accounts at
a point in time. Back in the days of Accounting on paper, it
was used to check that the Debit and Credit column totals match each other.
However, since the introduction of Accounting Software that check has become less and less
important, since it’s now done automatically. Nowadays, it is an Internal Document that
is typically used by Accountants to check for errors, and assist in the producing of
Financial Statements. It is also used by Auditors in deciding which
accounts to review. OK, so now we know what a Trial Balance means,
but what does it look like? It looks like this…
We have a complete listing of all General Ledger accounts running down the page, with
two columns for the Debit and Credit totals. In the title, we need to mention the period
end date since we’re looking at a snapshot at a point in time.
The account names are grouped by their type, typically we start off with Assets, Liabilities,
Equity and Dividends since this is the typical layout of a Balance Sheet.
Then we have all of the Revenue and Expense accounts which make up the Income Statement
or Profit and Loss. To reduce the size of a Trial Balance, accounts
with zero balances are normally left out completely. The columns that the account balances go in
usually line up with the “Normal Balances” of the account types.
Which we can remember using DEALER
Dividends, Expenses and Assets are normally Debit accounts, so these go on the Left.
Whereas Liabilities, Owner’s Equity and Revenue are normally Credit accounts, which go on
the Right. The totals of the Debit and Credit columns
should always match each other. If they don’t, then you’ll need to check
over your workings for errors. We’re Double Entry Bookkeeping at all times
so the total Debits and Credits are always equal.
However, Debit and Credit totals being equal doesn’t mean our Trial Balance is error-free.
We could have switched the Debits and Credits in a journal, and got them the wrong way round.
Or we could have posted the same journal twice. Or not even posted it at all.
We could have posted the journal to the wrong accounts entirely.
Or we could have posted a balanced journal to the correct accounts, but the numbers were
wrong because we messed up our workings. So by no means does a balanced Trial Balance
mean that it’s correct, but is certainly a good start.
Example time… We’re going to build the Trial Balance for
our Window Cleaning business. It’s been up and running for one month now
so we’re going to need to include all of those transactions from the previous two videos.
If you missed either of them, you might want to hit that pause button now and go check
them out to help clarify things. To create this Trial Balance, we’re going
to use something called a Working Trial Balance. This has a very similar format to the one
that I showed you before, except this time we aren’t going to split Debits and Credits
in two separate columns. Instead, we are going to identify Debits as
positive numbers and Credits as negative numbers to help us distinguish between them.
To start things off, we need a listing of all of the accounts our Window Cleaning business
has. Then we’re going to add 7 columns to the right
hand side of it. 6 for each of the journal entries, and a 7th
to calculate the total balances in each of the accounts.
Below the list of accounts, we are going to add one final row for the totals of the columns
so that we can check each of the journals balance as we enter them.
Now it’s time for us to enter these journals, I’m going to move through this next section
quite quickly, so if any of these accounting entries aren’t making sense then check out
those previous videos and you’ll be fine. First, the business owner invests $100 and
in return the business issues $100 in stock. We are going to Debit cash by $100 and Credit
Owner’s Equity by $100. Then, the business takes out a further $200
loan to fund its activities. We need to Debit cash again by $200 and Credit
loans payable by $200 as well. Third, the business spends thirty dollars
in cash on window cleaning equipment we Credit cash by $30 and we Debit equipment by $30.
Next, it spends a further fifty dollars on cleaning supplies, the payment is made on
account. So we Debit supplies by $50 and Credit accounts
payable by $50. After that, the business makes one hundred
and fifty dollars cleaning windows, using half of its supplies in the process.
We Debit cash by a hundred and fifty dollars and Credit revenue by a hundred and fifty
dollars to recognise the revenue. We also Credit supplies by $25 and Debit cost
of sales by $25 as well to account for half of the supplies being used up.
Finally, in the journal entries video, we spend $20 at the laundry to clean our equipment.
So we Debit laundry costs by $20 and we Credit cash by $20.
Now that we have all of our September journals written out, we can take the totals for each
account. You’ll notice that the sum of these totals
is zero. That’s a good sign, because it shows that
our Trial Balance is balanced. Now one last thing to finish this off…
Let’s reformat our Working Trial Balance to show our Debits and Credits in separate columns,
and let’s rename this to Trial Balance for the period ended 30th of September.
The total of our accounts with a Debit balance is $500 and the total of our accounts with
a Credit balance is also $500. So here we have our final Trial Balance for
the September accounting period. Let’s recap what we just learned there…
The Trial Balance is an accounting report that shows the closing balances of all GL
accounts at a point in time. It is an internal report, used by accountants
to check for errors and help produce Financial Statements.
The totals of the Debit and Credit columns must always match each other exactly for it
to balance. However, balanced columns doesn’t mean that
the Trial Balance is error-free. Thank you for watching.
If you enjoyed this video hit that Like Button, Subscribe if you want to see more, have a
great week and see you next time! [Music]

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