One of the greatest benefits of using a double-entry accounting system is the capability to generate a trial balance. What do we mean by trial balance? As the name suggests a trial balance is a report that must have its debits equals to credits. Understand the importance of trial balance and why it is balanced. Learn how it is prepared and in which format.
In the preceding tutorials, we illustrated the rules of debit and credit for recording transactions in accounts using journal entries. We also discussed the accounting equation and established that, in doing so, the sum of the debits is always equal to the sum of the credits for each journal entry. This equality of debits and credits for each transaction is built into the accounting equation and because of this double equality; this system of recording transactions is called the double-entry accounting system. In the double-entry accounting system, each accounting entry results in two nominal accounts being debited and credited with equal amounts.
The practice of recording the same debit amount to one account and an equal credit amount to another account results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances (Debit Balances) will be equal to the aggregate balance of all accounts having negative balances (Credit Balances). Trial Balance is the compilation of balances of all accounts in the general ledgers into debit and credit columns. In a double-entry accounting system the total debits equal the total credits hence a compilation of all the accounts will be balanced, that is Sum of Debits will be equal to the sum of credits and hence the sum of the trial balance will always be zero if debit balances are represented by positive amounts and credit balances are represented by negative amounts.
The first step to prepare a trial balance is to extract the account balances from each account in the general ledger in a columnar form. Thus, before the trial balance can be prepared, each account balance in the ledger must be determined. When the standard account form is used, the balance of each account appears in the balance column on the same line as the last posting to the account. The next step is to calculate the debits and then the credits in the respective columns. In short, the trial balance procedure involves five steps:
All automated accounting systems and ERPs come with trial balance as a standard report and it can be generated for each accounting period.
The important concept to understand is that a trial balance is a statement, not an account. It is the extraction of all balances from all accounts in a general ledger. It is valid for a particular date. It is always prepared with reference to an accounting period with reference to a particular date. Trial Balance is true for the date for which it has been drawn. The traditional format of trial balance includes the following columns:
Because of the volume of data manipulated when bookkeeping, errors are easy to make, since numbers are constantly being added or subtracted. How can users be sure that they have not made an error in posting the debits and credits to the ledger? One way is to determine the equality of the debits and credits in the ledger. A trial balance checks the equality of the debits and credits. Taking a trial balance is done after posting to the ledger, but can also be performed throughout accounting activities. This equality should be proved at the end of each accounting period, if not more often.
The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. If the balances equal in a trial balance, there still may be an error. Errors can easily be made because numbers are transferred so many times. During accounting activities, wrong amounts can be recorded, numbers transposed, and amounts debited instead of credited. Sometimes errors occur without affecting the balance.
If the two totals of a trial balance are not equal, an error has occurred. If the trial balance shows that the debits do not equal the credits, then another trial balance should be taken. If the debits still do not equal the credits, then an error exists and must be found.
There exist some techniques that are used by the accountants to locate the errors if the trial balance has resulted in unequal amounts. Some tips are given below:
Bookkeeping is the act of recording transactions, while accounting includes bookkeeping activities plus the preparation, analysis, and interpretation of financial information. Once we have recorded the transactions, the next step is to convert this data into meaningful information that can provide insights to the business stakeholders.
Trial Balance is usually drawn at the end of every reporting period. Trial Balance becomes the basis for advanced reports like Balance Sheet and Profit and Loss Accounts. The concept of “Balancing” and “Suspense Posting” ensures that Journals in an automated system and ERPs are always balanced resulting in a balanced trial balance. Trial Balance is used for financial reporting, management reporting, consolidation process, and reconciliation processes.
GL - Accrued / Unbilled Revenue
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. Understand what we mean by the terms accrued revenue, accrued assets, and unbilled revenue. Explore the business conditions that require recognition of accrued revenue in the books of accounts and some industries where this practice is prevalent.
In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
Operational Structures in Business
Large organizations grow through subsidiaries, joint ventures, multiple divisions and departments along with mergers and acquisitions. Leaders of these organizations typically want to analyze the business based on operational structures such as industries, functions, consumers, or product lines.
Team-Based Organizational Structure
Team-based structure is a relatively new structure that opposes the traditional hierarchical structure and it slowly gaining acceptance in the corporate world. In such a structure, employees come together as team in order to fulfill their tasks that serve a common goal.
Global Business Services (GBS) Model
Global business services (GBS) is an integrated, scalable, and mature version of the shared services model. Global Business Services Model is a result of shared services maturing and evolving on a global scale. It is represented by the growth and maturity of the Shared services to better service the global corporations they support.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
What Is a General Ledger? General Ledger (also known in accounting as the GL or the Nominal Ledger) is at the heart of any accounting system. A general ledger is the master set of accounts that summarize all transactions occurring within an entity. Ledger is the skillful grouping and presentation of the Journal entries. Learn the accounting fundamentals, general ledger process, and general ledger flow.
Concept of Representative Office
A representative office is the easiest option for a company planning to start its operations in a foreign country. The company need not incorporate a separate legal entity nor trigger corporate income tax, as long as the activities are limited in nature.
Legal Structures for Multinational Companies
A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. A multinational company (MNC)is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
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