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In today's video we're going to build ourselves a Trial Balance like this one…
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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!
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