Accounting Unplugged


Financial Statements – Trial Balance

Posted in 5. Financial Statements by Erin Lawlor on the September 5th, 2008

<< General Ledger – Accounting Periods >>Financial Statements – Income Statement

I decided to skip ahead a little and introduce the financial statements.  We’ve covered the basics well enough to make sense of them so for now, let’s stick to the subject of the Payoff and go back to cover the details of subledgers and month ends in future posts.

The General Ledger takes the information from transactions and summarizes it by Account and by Accounting Period.  The four basic Financial Statements present General Ledger (GL) Accounts and their balances by specific date ranges, usually accounting periods. The four basic financial statements are:

In this Post, I’ll introduce the most basic and simple of the statements -The Trial Balance.

The Trial Balance is a listing of all General Ledger (GL) Accounts and their balances at any given time in order of GL Account Number.  It is often used as a quick check of a balance and also as a worksheet for adjusting entries.  One of the advantages of this report is that it contains *all* accounts and their balances from the General Ledger.

The Trial Balance is different from the other Financial Statements because it is the only one that lists all Accounts, the Income Statement and the Balance Sheet split the Accounts and the Cash Flow Statement uses the same Accounts as the Balance Sheet.

The Standard Trial Balance is straight forward and doesn’t require any further explanation. It is a quick report that can be printed or viewed to check the balance of specific accounts and to make sure that the books are in balance – that debits = credits.

The Comparison Trial Balance is also straight forward and provides the same information as the standard version but it gives balances both by account and by accounting period. Time analysis is essential in managing and securing resources because it can quickly pinpoint changes that indicate errors or fraud as well as the unexpected changes that might require adjustments to cash planning and/or operations.

We have already seen both versions of the Trial Balance and I’ll reprint them here for review.

Standard Trial Balance as seen in Post #4 (with Account Numbers that were added in Post #5)

Account Description Debits Credits
1000 Checking Account $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
2000 Accounts Payable $1,700
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7300 Credit Card Interest and Fees $50
Totals $51,700 $51,700

This is the Comparison Trial Balance Report from post # 7

Account Description Jun Jul Aug Sept Oct Nov Dec Total
1000 Checking $0 $0 $0 -$3,000 $0 $0 $0 $-3,000
….. ……….
7000 Rent $0 $0 $0 $3,000 $0 $0 $0 $3,000
Totals $0 $0 $0 $0 $0 $0 $0 $0

**This example starts with June because of space limitations here.

© 2008 – 2010 Erin Lawlor

Next Up: >>Financial Statements – Income Statement

<< General Ledger – Accounting Periods

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

10 Responses to 'Financial Statements – Trial Balance'

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  1. Ardi said,

    on April 2nd, 2009 at 2:51 am

    In the sample above, why the Accounts Receivable, which is $0, must be stated or written in the report?

  2. admin said,

    on April 2nd, 2009 at 7:36 am

    Ardi,

    Accounts with a zero balance are not required to be stated on any of the financial reports. I included it on the Trial Balance here only because I had given examples that involved the Accounts Receivable account and I wanted to show the balances for all accounts from my examples.

    Erin

  3. John said,

    on April 21st, 2009 at 9:16 am

    Does trial balance have to zero balance? Because from my understanding that at the end it gives you Net Incomce (G/L) and it is in Income statment and goes to Balance sheet. Please clarify.

    Thanks

  4. admin said,

    on April 21st, 2009 at 10:31 am

    The Trial Balance must have a zero balance because it includes all financial accounts and their balances and in double entry accounting debits must always equal credits.

    The Trial Balance shows balances for each account BUT the point major point of the statement is to show that your books are in balance, meaning that your total debits equal your total credits.

    The Income Statement and Balance Sheet split the accounts between them – all accounts are Either on the Income Statement OR on the Balance Sheet.

    Net Income can be calculated by taking the difference of the account balances for either the Income Statement or the Balance Sheet. Because those two statements split all accounts between them, the difference between the account balances for the Income Statement will be the same as the difference between the account balances for the Balance Sheet. That difference is Net Income.

    Net Income is not a financial account, it is a result of a calculation and it is shown at the bottom of the Income Statement (Revenue – Costs – Expenses = Net Income) and at the bottom of the Balance Sheet (Assets – Liabilities – Owners Equity (Stock) – Retained Earnings = Net Income).

    At the end of each fiscal (business) year, the Net Income amount is posted into a financial account (either Owners Equity or Retained Earnings). The closing entry that posts Net Income to a Balance Sheet Equity account also resets all Income Statement accounts to zero.

    This closing entry takes the balances for all Income Statement accounts at year end and:

    Debits the balances of all Revenue Accounts
    Credits the balances of all Cost Accounts
    Credits the balances of all Expense Accounts
    Credits (or Debits in the case of a net loss) the difference (Revenue – Costs – Expenses) to Retained Earnings (or Owners Equity for a non C Corp in the US)

    Hope this clarifies things a bit

  5. john said,

    on April 21st, 2009 at 12:26 pm

    What about retained earnings, won’t that be in Balance sheet every month? If it is not in BS then how can balance sheet balance without it? Sorry if I am talking basic accounting.

  6. admin said,

    on April 21st, 2009 at 1:14 pm

    The purpose of this site is basic accounting, I am pleased to have questions to answer.

    The Balance Sheet doesn’t actually balance until net income is posted to retained earnings at the end of the year.

    When you read a Balance Sheet notice the entry at the bottom for net income. Net income is not an account, it is a calculation which, on the Balance Sheet, is actually the difference between the Balance Sheet account balances for the current year.

    Net Income = Difference between either the Income Statement Accounts, or the difference between the Balance Sheet Accounts for the current year only.

    Retained Earnings = cumulative net income for all prior years – cumulative distributions to owners (stockholders) for all years.

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