Trial Balance: How to Prepare It and How to Read It

Trial Balance: How to Prepare It and How to Read It

A trial balance that ties only proves one thing: total debits equal total credits. It does not tell you whether accounts are classified correctly, whether the figures are right, or whether the profit is real. That gap explains why so many companies close the month with matching columns and find the problem months later, when the bank asks about a balance or the DIAN cross-checks the information.

Here is the whole document: how to build it from the general ledger, which errors it catches and which it lets through, how to read each balance, and when to distrust a perfect tie.

What it is and what it is for before closing

It is a list of every account with activity in the period, showing total debits, total credits and the resulting balance. It comes from the general ledger, not the journal, and its purpose is control: to confirm that double entry was respected, that no entry stayed behind, and that each account ended with a balance consistent with its nature.

It is useful before closing for three reasons. It is the last point where a transcription error can still be traced easily. It lets you review account by account before posting adjustments, so the adjustments correct reality and not the imbalance. And it is the base for the balance sheet and the income statement: if the base is off, everything built on it carries the error.

It is not a financial statement: it is not published, not signed, and does not replace the balance sheet. It is an internal working paper, and its value lies in the review, not in the file.

The four columns: activity and balances

The classic format has four value columns besides the account name. The first two hold activity: everything debited and everything credited during the period. The next two hold balances: the net result of that activity, placed in the column that matches its sign.

Each account appears once and only one of the two balance columns is filled, never both. If an account has debits of 85.700.000 and credits of 14.000.000, its balance is a debit of 71.700.000 and the credit balance cell stays empty. When someone writes the balance in both columns so it "looks complete", the totals stop matching even though the books are fine.

Why debits and credits must match

Every entry is recorded with the same amount on the debit and the credit side. The rule is not decorative: it is how the system checks itself. If each entry is balanced, the sum of debits across all accounts must equal the sum of credits.

That gives the equality you are looking for: total debit balances equal total credit balances. And it gives a practical consequence: when the columns do not match, the difference is a recording error, almost always arithmetic or a transcription slip. It is not an accounting debate: it is a mistyped figure or an entry missing a line.

The equality says nothing about the result. Matching debits and credits only confirms the mechanics were respected. Books can tie to the cent and still be wrong about everything else.

Which errors it catches and which it does not

The trial balance catches the errors that break the equality and lets through every error that keeps it. Those tend to be the expensive ones, because nobody looks for them.

One it does catch: a debit of 800.000 entered as 80.000. The debit column falls short by 720.000, the trial balance does not tie, and the error surfaces at once, even if the cause still has to be found.

One it does not catch: a sale of 4.000.000 recorded as 400.000, with the same mistake on both the debit and the credit side. The equality holds, the columns tie, and profit is wrong by 3.600.000. The trial balance cannot know: the error is symmetrical.

It is a filter of form, not of substance: it rules things out, it does not confirm them. Once it ties, the real work begins with reconciliations.

How to build it from the general ledger

The procedure has seven steps. Close the journal, with no pending entries and no unrecorded documents. Post everything to the ledger, account by account. Total debits and credits per account. Compute the balance. List the accounts with activity in chart-of-accounts order. Total the four columns. Compare the two activity totals and the two balance totals.

The step most often skipped is the second. Whoever adds up journal balances and presents that sum as a trial balance loses the purpose of the document: it does not prove the entries reached the ledger, only that the journal is balanced.

The example uses the six journal entries, with no opening balances:

• 1. Capital contribution: debit to Bank for 50.000.000 and credit to Capital for 50.000.000.
• 2. Purchase of merchandise on credit: debit to Inventory for 20.000.000 and to VAT receivable for 3.800.000; credit to Suppliers for 23.800.000.
• 3. Cash sale with its cost: debit to Bank for 35.700.000; credit to Revenue for 30.000.000 and to VAT payable for 5.700.000. In the same entry, debit to Cost of sales for 18.000.000 and credit to Inventory for 18.000.000.
• 4. Payment to suppliers: debit to Suppliers for 5.000.000 and credit to Bank for 5.000.000.
• 5. Rent payment: debit to Rent expense for 3.000.000 and credit to Bank for 3.000.000.
• 6. Payroll payment: debit to Payroll expense for 6.000.000 and credit to Bank for 6.000.000.

After posting everything to the ledger, debits total 141.500.000 and credits 141.500.000. Debit balances add up to 104.500.000 and credit balances to 104.500.000. The difference is zero.

Check Bank by hand, because that is where errors concentrate: 50.000.000 plus 35.700.000 in, minus 5.000.000, 3.000.000 and 6.000.000 out, gives 71.700.000. If it does not match the bank statement, the problem is not the addition but a transaction that was missed or recorded twice.

How to read the balances: what is normal and what is not

Every account type has a natural side. Assets live on the debit side; liabilities and equity on the credit side; revenue on the credit side; expenses and costs on the debit side. As long as balances respect that logic, the trial balance reads cleanly. When they do not, there must be an explanation written somewhere.

There are legitimate exceptions. Accumulated depreciation is a credit account that sits inside assets and reduces them; the allowance for doubtful accounts does the same with receivables. These are contra accounts, and their presence signals judgment, not disorder.

Anomalous balances are a different matter. A negative Bank balance is not a bank with less money: it is an overdraft, which is a liability. A debit balance in Suppliers is usually a misclassified advance or a duplicate payment. A credit balance in Receivables is an advance received, also a liability.

There is a fourth group that shows up not in the figure but in its absence: accounts that should have activity and sit at zero. A month with payroll paid and zero payroll expense is as serious as an imbalance, only silent.

Warning signs in a trial balance that ties

If the columns tie, the review is not over: it starts. These are the signs an experienced accountant checks before signing off.

The first is VAT. Output VAT should keep a stable ratio to taxable revenue, and input VAT a stable ratio to purchases. In the example, 5.700.000 over 30.000.000 gives 19%, and 3.800.000 over 20.000.000 gives the same. When the ratio breaks, there is an uninvoiced sale or VAT parked in the wrong account.

The second is withholdings. Income tax withholding, VAT withholding and municipal withholding accumulate as a liability until paid. A balance that grows month after month with no return backing it is a debt to the DIAN or to the regional government, and a cash problem that appears all at once.

The third is the link between Bank and statements. If the ledger balance does not match and the gap is not explained by checks in transit or bank fees, a transaction is missing.

The fourth is profit against cash. A business reporting profit without cash is financing receivables or inventory. Compare receivables growth with sales growth.

The fifth is the round entry. A large charge to other expenses or to unclassified accounts right at the cut-off date, with no supporting document, is the most common way to make a trial balance tie when it should not.

Eight-column trial balance and adjustments

The four-column version works when the period starts from zero, which almost never happens: there are opening balances and there are adjustments made precisely at closing. That is what the eight-column format is for.

The eight columns are: opening balance debit and credit, period activity debit and credit, adjustments debit and credit, and closing balance debit and credit. Each pair is totaled separately, so you can see whether a balance was carried over from prior months.

The usual adjustments are four: depreciation for the period, allowance for doubtful accounts, accrual of services received but not yet invoiced, and amortization of prepaid items. All are recorded like any other entry, with equal debits and credits, so the adjustment pair must tie on its own. An imbalance that appears only there points to an adjustment made with no counterpart.

The recommended order is: four columns to check the mechanics, review of anomalous balances, documented adjustments, eight columns, and only then the financial statements. Skipping the first step ends in an adjustment that hides the symptom without fixing the cause.

From the trial balance to the financial statements

The trial balance is handed to nobody. What gets delivered is the balance sheet and the income statement, both built from it with one extra classification: assets, liabilities and equity to the first; revenue, expenses and costs to the second.

With the example figures the conversion is direct. Profit is 30.000.000 in revenue minus 18.000.000 in cost of sales, minus 3.000.000 in rent and minus 6.000.000 in payroll: 3.000.000. Assets are 71.700.000 in Bank, plus 2.000.000 in Inventory, plus 3.800.000 in VAT receivable: 77.500.000. Liabilities are 18.800.000 in Suppliers plus 5.700.000 in VAT payable: 24.500.000. Equity is 50.000.000 in Capital plus 3.000.000 in profit: 53.000.000. Liabilities plus equity give 77.500.000, equal to assets.

That second check is stricter, because it forces you to classify and decide. A trial balance that ties can produce a balance sheet that does not, if an account went into the wrong group.

How often to run it

Once a month is the reasonable minimum, and always before closing: run after the financial statements are issued and it is no longer a control, just an archive. With high invoice and payment volume, run it weekly. It should never be missing before the VAT return, before applying for credit, or at year end. Ideally someone other than the person who posted reviews it: whoever typed an error is trained not to see it.

Common mistakes

The five most frequent mistakes share one trait: all produce a document that ties and none produces a useful document.

Using the trial balance as a financial statement leaves out the current and non-current split. Leaving accounts with a reversed balance hides liabilities and distorts assets. Adding balances without posting the whole journal to the ledger produces an inflated profit. Forcing a tie with a blind adjustment hides the difference and erases the trail. And skipping VAT and withholdings ends in penalties and interest.

An honest close before trusting the tie

The trial balance is a control, not a result. At its best it forces you to look at every account and ask why a balance behaves the way it does. At its worst it is paperwork done so you can say the books are current.

There are cases where it adds little. If the company has few transactions, the ledger is already short and the trial balance adds little beyond a sum. If the chart of accounts is poorly designed, it will tie and still say nothing useful. And if the problem is substantive, such as unrecorded revenue, uncounted inventory or uncollected receivables, no column will reveal it.

That is why the next step is never signing off: it is reconciling against the bank statement, against electronic invoicing, against withholding certificates and against the physical count. That cross-check is what turns a tied document into reliable books. Inventory and invoicing software such as Kardex Tauro helps at that stage, because the warehouse movement, the invoice and the entry come from the same record.

Before closing the month, pick three accounts at random and explain each balance with a document. If you can, the trial balance is fine. If you cannot with three, the problem was never the addition.

Keep reading

• Journal and general ledger: what they are and how to keep them
• How to Read the Balance Sheet and the Income Statement Together