Understanding trial balances and journal entries

Imagine a company preparing its financial statements only to find that the numbers don’t add up. A single incorrect entry could lead to misleading financial reports, regulatory non-compliance, and costly errors. To prevent such issues, accountants use trial balances and journal entries to maintain accuracy and consistency in financial reporting. These fundamental accounting tools help businesses keep organised records, detect errors, and produce reliable financial statements.

In this guide, we’ll explore trial balances and journal entries, how they work together, and the steps to prepare an accurate trial balance.

What is a trial balance?

Definition

A trial balance is a financial report that lists the balances of all ledger accounts at a given point in time. It confirms that total debits and total credits in the accounting system are equal, helping identify potential discrepancies before preparing financial statements.

Purpose of a trial balance

The trial balance serves several important functions:

• Error detection: It helps accountants identify discrepancies in the general ledger, such as transposition errors or omitted entries.
• Financial reporting: The trial balance forms the foundation for financial statements, including the balance sheet and income statement.
• Internal controls: This means transactions are recorded correctly, maintaining the integrity of financial data.
• Simplifies auditing: A balanced trial balance allows auditors to verify financial records quickly.

Types of trial balance

There are three main types of trial balances:

1. Unadjusted trial balance: Prepared before adjusting entries, listing all ledger balances.
2. Adjusted trial balance: Includes necessary adjustments for accrued revenues, expenses, and depreciation.
3. Post-closing trial balance: Compiled after closing entries to ensure all temporary accounts (e.g. revenues and expenses) are cleared.

What is included in a trial balance format?

A standard trial balance includes:

• Account names: Lists all active accounts.
• Debit and credit balances: Displays each account’s balance.
• Total debits and credits: This shows that the accounting equation remains balanced.

What are journal entries in accounting?

Definition of journal entries

A journal entry is the first step in the accounting cycle, recording financial transactions in the general ledger. Each entry consists of a debit and credit, meaning that the accounting equation (assets = liabilities + equity) remains balanced.

Types of journal entries

There are several types of journal entries used in accounting:

1. Adjusting journal entries: Used at the end of an accounting period to account for accrued expenses, prepaid expenses, or depreciation.
2. Closing journal entries: Transfers balances from temporary accounts (revenue, expenses) to retained earnings at the end of a financial period.
3. Reversing journal entries: Used to reverse adjusting entries made in the previous period, simplifying record-keeping for accruals.
4. Compound journal entries: Involves multiple accounts in a single transaction, such as payroll expenses.

How trial balance and journal entries work together

The role of journal entries in preparing a trial balance

Journal entries form the basis of the trial balance. Each transaction is recorded in the journal before being posted to the general ledger. The accuracy of a trial balance depends on properly recorded journal entries.

How trial balance validates journal entries

Once all journal entries are posted, a trial balance is extracted to verify that total debits equal total credits. If discrepancies arise, accountants review journal entries for errors and make necessary adjustments.

Common issues linking trial balance and journal entries

• Incorrect journal entries: Misrecorded transactions lead to imbalances in the trial balance.
• Omitted transactions: If an entry is missing from the journal, it won’t appear in the trial balance.
• Errors in posting: Mistakes in transferring journal entries to the general ledger can cause discrepancies.

Key steps to prepare a trial balance

Step 1: Record all journal entries

Every financial transaction must be recorded as a journal entry. Each entry must include a date, account names, debit and credit amounts, and a brief description.

Step 2: Post entries to the general ledger

Journal entries are transferred to the general ledger, where each account is updated with debit or credit balances. This step organises transactions into specific accounts such as cash, accounts payable, or revenue.

Step 3: Extract balances and prepare the trial balance

After posting all entries, the trial balance is prepared by listing all account balances under the debit and credit columns. If total debits and credits match, the books are balanced. If not, errors must be identified and corrected.

Common errors in trial balance and how to fix them

Transposition and slide errors

A transposition error occurs when numbers are recorded in the wrong order (e.g., writing 540 instead of 450). A slide error happens when a decimal point is misplaced, leading to incorrect balances.

Omitted or duplicate entries

Missing or double-recorded journal entries can cause imbalances in the trial balance. Reviewing the general ledger and source documents helps identify and correct these errors.

How to identify and correct errors

• Check the difference: If total debits and credits don’t match, find the difference and check for an account with a matching error.
• Review recent journal entries: Errors often occur in the latest transactions.
• Divide by nine: If the difference between correct and incorrect figures is divisible by nine, it may indicate a transposition error.
• Use trial balance automation: Automated reconciliation tools help identify and correct errors quickly. (Better still, by deploying Aurum’s automated journal entry alongside it’s reconciliation capabilities, you can be sure that journals are based on accurate data.)

Preventing future errors in trial balance

• Regular reconciliations: Reviewing accounts frequently prevents discrepancies from accumulating.
• Standardised accounting procedures: Clear documentation of accounting processes minimises manual errors.
• Automation software: Using digital tools reduces human error and speeds up the reconciliation process.

Conclusion

Trial balances and journal entries are fundamental components of the accounting process. By maintaining accurate journal entries and preparing a properly balanced trial balance, businesses can maintain financial integrity and compliance. Leveraging automation can simplify the process, reduce errors, and improve efficiency.

Find out more about trial balances here

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