It necessary, from time to time, to check the General Ledger for accuracy. The process of drawing up a trial balance checks the arithmetic accuracy of the general ledger and whether all postings to the ledger observed the rules of double-entry bookkeeping.
This is usually done on a monthly basis but the time interval between this checking procedure is arbitrary. It depends on the policies and procedures of the business organisation.
Definition: The trial balance is a list of ledger account balances prepared on a particular date.
The procedure for preparing a trial balance is:
The end of month balance for each account in the ledger must be calculated. In the example below, the Cash at Bank A/c has an opening debit balance of $5342.50. During the month funds of $2514.00 were banked and payments of $3265.50 were made leaving a month end debit balance of $4591.00. The "Balance" column in the ledger exists to help keep a running balance of the account as each posting is made to the account. Example, Cash at Bank A/c:
|31/01/11||Cash Payments Journal||3265.50||2077.00||Dr|
|31/01/11||Cash Receipts Journal||2514.00||4591.00||Dr|
Some accounts in the ledger may have many postings some may have no postings during the month.
On the document that you have headed "Trial Balance" in Step 1 above, make a list of every account in the ledger. Then write the month end balance of the account in the appropriate column. Be careful not to place the account balance in the wrong column. This is often a cause of error and the reason why the trial balance does not balance. Also ensure that you do miss any accounts in the ledger.
As this process unfolds your document will resemble the example below although there may be many more accounts:
Lots of Fun Incorporated
Trial Balance as at 31 January 2011
|Accumulated Depreciation on Office Equipment||975.00|
|Cash at Bank||4591.00|
|Accumulated Members Funds||7238.85|
|Office Equipment at Cost||5410.00|
In the above example both the debit and credit columns have been totalled and agree at $15,957.50.
Although a trial balance may "balance" it does not follow that there are no errors. There may have been incorrect amounts entered on both sides of the ledger. There may also have been entries to wrong Accounts but on the right side. Furthermore it is possible that transactions have been entirely omitted.
Therefore some degree of comfort is afforded when both sides balance but there is no guarantee of correctness.