What is a Trial balance?

The Trial balance position in the Transaction accounting flow in FIGG Excel accounting system

The source of information for a Trial balance to be generated is all the transactions processed from:

• •         Bank statements
  •         Accounts receivable (also known as Debtors)
  •         Accounts payable (also known as Creditors)
  •         Journals

A Trial balance is a report that shows total values of all transactions of the business from the very first transaction when the business started trading.  All “higher level” reports are generated from the Trial balance.   An accounting system that does not use a Trial balance as the central report of bookkeeping is doomed to produce inaccurate figures.

A Trial balance has a debit column and a credit column.  Each item or account on the Trial balance has a value which will be the total of all the debits and credits of transactions from the sources listed just above.

If a Trial balance is incorrect, no other report of a business will be correct.

Examples of debit and credit transactions are listed below. A line item or account on a Trial balance cannot have a value in both debit and credit columns.  The totals of the debit column must equal the total of the credit column or it will not balance. If a Trial balance does not balance it means that it has failed the first principle of accounting – One or more transactions were processed with only a debit or only a credit. Continue reading for a more detailed explanation.

Example of a Trial 

As you can see, the trial balance lists every single account that has transactions from and to each account.  No other formal report lists every account with Trial balance totals.  The Income statement only reports on Income and Expense accounts.  The Balance sheet only reports on Equity, Assets and Liability accounts.

 What is the purpose of a Trial balance?

You may have heard of the accounting principle “for every debit there must be a credit”. That principal is the Genesis chapter 1, verse 1, of accounting.  The Trial balance proves that this principal has been applied accurately to all transactions. (see below for more on this)

Some languages, when translating directly to English, call the Trial balance, the Prove balance.  The Prove balance name emphasises that it is to prove that each transaction has been entered as a debit and a credit.

What is “for every debit there must be a credit” that ensures a balancing Trial balance?

The basic principle is:

For money going out of the business:

The debit is “what did you pay for” and the credit is “where did the money to buy it come from”?

For every debit there must be a credit examples of basic transactions for money going out:

The debit is “what did you pay for” and the credit is “where did the money to buy it come from”?

You pay the telephone account doing an electronic transfer from the cheque account,

1. Debit – Telephone expense (what you did with the money you paid)
2. Credit – Bank cheque account (where the money came from)

You purchase stationery using the credit card

1. Debit – stationery expense (what you did with the money you paid)
2. Credit – Credit card account (where the money came from)

You borrow money from a vehicle finance bank to purchase a vehicle

1. Debit – Vehicles at cost (what you did with the money you paid)
2. Credit – Vehicle finance institution (where the money came from)

You purchase stock from a supplier (on a 30-day account), that you are going to sell for a profit

1. Debit – Cost of sales expense or Stock depending on how fast you are going to sell it.
2. Credit – Accounts payable (also called Creditors) (not yet paid by the business but you must record it so that your system can remind you who the business owes money to and how much money)

You pay the supplier who you owe money to on a 30-day account

1. Debit – Accounts payable (also called Creditors) (what did you do with the money you paid; you paid the supplier)
2. Credit – Bank cheque account (where the money came from)

You purchase refreshments, using your personal credit card, for the business

1. Debit – Refreshments expense (what you did with the money you paid)

2. Credit – Shareholders loan account (where the money came from)

The business refunds you for purchases made using your personal credit card

1. Debit – Shareholders loan account (what you did with the money you paid)
2. Credit – Bank cheque account (where the money came from)

You depreciate a vehicle over 5 years (this type of transaction is explained in the income statement section)

1. Debit – Depreciation expense
2. Credit – Accumulated depreciation vehicles

For every debit there must be a credit examples of basic transactions for money coming in:

The debit is “where did the money go” and the credit is “where did the money come from”?

You start a business and deposit 500 of your own money in the business bank account.

1. Debit – Bank cheque account (where the money went)
2. Shareholder loan account (the money came from the Shareholder)

Someone buys items from your business and pays immediately with their credit card

1. Debit – Bank cheque account (where the money went)
2. Credit – Sales (the money came from a Sale)

You return faulty items to a supplier and they refund you in Cash and you used the cash to buy something for yourself.

1. Debit – Shareholders loan (where the money went)
2. Credit – Cost of sale (or wherever you allocated it to when you first bought it)

You borrow money to pay for various things to get the business up and running

1. Debit – Bank cheque account (where the money that you borrowed went)
2. Credit – Loan account, name of borrower (the money came from the borrower)

You make a sale to someone and give them 30 days to pay the business

1. Debit – Accounts receivable (also called Debtors) (where the money went – not yet in your bank account but you must record it so that your system can remind you who owes you money.
2. Credit – Sales (the money came from a Sale)

The client who bought from you on a 30-day account, now pays the business

1. Debit – Bank cheque account (where the money went)
2. Credit – Accounts receivable (also called Debtors) (the money came from a client who bought on credit)

What is Retained income on a Trial balance?

Retained income (also sometimes called Accumulated profit / (loss)) appears primarily on a Trial balance and Balance sheet.  It is the value of total Income less Expenses from the day the business started trading.  The huge difference between Net profit/(loss) on a report and Retained income on a report is this.

Net profit/(loss) = Income less expenses from the 1^st day of that financial year. (current financial year).  If the expenses are more than the income the value will be a loss, displayed   in brackets

Retained income/(loss) = Income less Expenses from the 1^st day the business started  trading, (prior financial years).  If the expenses are more than the income the value will be a loss, displayed in brackets

So, let’s say your financial year runs from 1 March to 28 Feb every year.

Then let’s say the business started trading 1 September 2016 (financial year end Feb 2017)

So, the first financial year of the business was 1 September 2016 – 28 February 2017.

And let’s say the Trial Balance is dated 30 July 2020.

The Net profit/(loss) value will be the total Income less total Expenses from 1 March 2020 to – July 2020, which will be referred to as the current financial year.  If the expenses are more than the income the value will be a loss, displayed in brackets like the example below of (152,719)The Retained income value will be the total Income less total Expenses from 1 September 2016 – 28 February 2020, which is referred to prior financial years.

Logically, if you add Net profit/(loss) of each financial year from the first financial year of trading, that is then the same as the total Income less total Expenses from the day the business started trading, which is then Retained income.

Net profit/(loss) Financial year ending Feb 2017   Loss                     (306,721)

Net profit/(loss) Financial year ending Feb 2018   Profit                         9,253

Net profit/(loss) Financial year ending Feb 2019   Loss                         (5,648)

Net profit/(loss) Financial year ending Feb 2020   Profit                      150,397

Retained income/(loss)   Financial year ending Feb 2020                  (152,719)

There is a format of a Trial balance that adds the current year’s Net profit/(loss) to the prior years Retained income and then they have subtotals flying around on the Trial balance report.  Personally, I am of the view that a spiteful accountant invented that format of Trial balance just to make accounting near impossible confusing.  If you come across a Trial balance like this, just strip out the sub totals and put the format of the Trial balance in this format to see the figures you need to see: