What is a Trial Balance?
Originally, the trial balance was used as a checking tool.
How it Works
In the days of manual accounting systems, it was easy to make mistakes while recording transactions.
To check for errors, accounts clerks used a two-step process.
Step 1—Check Control Accounts
First up, they checked the control accounts.
They did this by checking the control accounts against the records of other businesses.
For example, the checking control account will contain a record of every transaction made with the bank.
In its month-end statement, the bank will also show a record of every transaction made with the bank.
So, to check the control account, they checked its transactions against those shown on the bank statement.
If the records agreed, it showed the control account was correct.
Theoretically, if the control account was correct, the other accounts should have been correct, as well.
The reason for this was because of the double – entry system.
With the double-entry system, you recorded each transaction with a double entry.
One entry showed where the money or value came from.
The other shows where that money or value was used—or where it went.
Accounting theory dictates that for every debit there should be a corresponding credit.
So if the transaction shown in the control account is correct, the duplicate transaction should be correct, as well.
The problem was it was easy to make a mistake while recording the other side of a transaction.
So, while the transaction shown in the control account was correct.
The supposed duplicate copy was incorrect.
To quickly check for such errors, accounts staff used the second step of the two part checking process; the preparation of a trial balance.
Step 2—Preparing a Trial Balance
All the accounts in your accounting system form what is known as the general ledger.
Each account in the general ledger has a balance.
Some accounts will have a credit balance.
Others have a debit balance.
The underlying principle of the double-entry system is that for every debit, there should be a corresponding credit.
If this is the case, the trial balance will balance.
However, if the records contained an error or errors, total debits would not equal total credits.
To prepare a trial balance, clerks began by finding the balance of each account in the general ledger.
Then they listed these balances in trial balance, in either the debit column or the credit column.
Finally, they tallied the columns to determine if they were equal or not.
© R.J (Bob) Hickman 2020