Accounting 101 – Closing Trial Balance Sheet
Financial Preparation of the Income Statement and Balance Sheet
Nov 15, 2009
Journal posting errors are not uncommon. At the close of each accounting period, the trial balance sheet is created to ensure that each account balances before the financial statements are created. The trial balance sheet acts as a tool to ensure the integrity of the financial statements. Once all the accounts are in balance, the income statement and balance sheet can then be created.
Creating the Closing Trial Balance Sheet
All of the general ledger (GL) accounts and their ending balances are listed on the trial balance. They are generally listed in order by GL category as follows.
- Assets
- Liabilities
- Owner’s Equity
- Income or Revenue
- Expense
Once all the GL accounts and their ending balances are listed, the debit and credit balances are totaled separately. Once the debits and credits are totaled, the total amount of debits must equal the total amounts of credits. The preliminary trial balance is usually created before the month end adjustments are posted to the general ledgers. The general journal is used to make month end adjustments.
Trial Balance - Correcting Out of Balance Errors
The reason a preliminary trial balance is created without adjusting entries is it’s easier to find out-of-balance errors. If the debits and credits don’t match, further analysis of the general ledger and journal postings must be undertaken. Once the errors are corrected, the adjusting entries should be posted to the trail balance sheet. The total debits and credits are then totaled again to make sure they are in balance.
Tips for Finding Out of Balance Errors
- Double-check the addition of debits and credits.
- Make sure that all the general ledger accounts are listed.
- Double-check that the general ledger amounts are correct on the trial balance work sheet
- If 3 can be divided into the difference in debits and credits, the probable cause is a transposed number like 68 instead if 86. The difference in this example is 12, which is divisible by 3.
- Divide the difference of the debit and credit by 2 and look for that amount on the trial balance. This usually indicates a debit listed as a credit of vice versa.
Finalizing the Closing Trial Balance
Once the debits and credits are in sync, the GL account totals are then transferred to the appropriate financial statements. The top portion of the trial balance mirrors the balance sheet with assets, liabilities and owner’s equity. The bottom portion is made up with the income and expense GL accounts, which are used to create the income statement.
The trial balance is more important for the income statement. The balance sheet debits and credits must balance on the actual report. The income statement does not balance. The trial balance ensures that the integrity of the GL accounts reflect a true representation of profit or loss.
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