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This is because if the debit and credit side of the trial balance agrees, then it is assumed that the journal, subsidiary books, and ledgers are correctly and properly maintained. The main reason for the trial balance to match is the ‘Double Entry System’ of accounting. According to the double entry system, every transaction is recorded twice, once on the debit side and the other on the credit side. So, for every debit entry, there is a corresponding credit entry. Though it is not conclusive proof of the correctness of all books of accounts because there can be some errors despite the fact that the total of both sides of the trial balance is matching. A trial balance is a list of all the balances in the nominal ledger accounts.
Businesses prepare a trial balance regularly, usually at the end of the reporting period to ensure that the entries in the books of accounts are mathematically correct. In addition, any time you suspect an error in your books, you should quickly put together a trial balance to check that your debits and credits are correctly balanced. Debits and credits of a trial balance must tally to ensure that there are no mathematical errors. However, there still could be mistakes or errors in the accounting systems. A trial balance can be used to assess the financial position of a company between full annual audits.
Chapter 4: Bank Reconciliation Statement
Your business transactions are initially recorded in your general ledger. Each transaction will receive its own journal entry connected to the corresponding account name. You should try to create a trial balance at least once every reporting period. This ensures that your books are correct and that you can withstand a financial audit. A balance sheet should be prepared annually and distributed to investors or relevant financial institutions. And while a trial balance is prepared purely for your internal controls, a balance sheet is required to manage your company’s finances.
For example, an entry in which the debit and credit should both have been $100 is instead entered as $1,000 to both the debit and credit accounts. This means that the entry is balanced, and so would not be spotted via a trial balance review – and yet is still incorrect. Alternatively, the parent company may require all of its subsidiaries to use the same accounting system, so that all subsidiary results can be automatically rolled up into consolidated financial statements. Business owners may also choose to prepare a trial balance in the middle of a standard reporting period to assess financial position and ensure that accounting systems are on track. Companies can use a trial balance to keep track of their financial position, and so they may prepare several different types of trial balance throughout the financial year.
How Do You Match a Trial Balance?
The adjusted trial balance would correct the error by adding a $600 debit to expenses. If you don’t use a trial balance, you risk preparing financial statements with potentially inaccurate data. The most significant difference between a what is a trial balance trial balance and a balance sheet is the target audience. A trial balance is created as an internal document that rarely leaves the accounting team. A balance sheet is part of the documents that make up a company’s financial disclosure.