The trial balance and finding errors

Once a period's journal entries have been posted, the bookkeeper prepares a trial balance: a list of every account in the ledger with its debit or credit balance, and totals of the two columns. If the totals agree, the ledger is at least arithmetically in balance. If they disagree, there is an error somewhere, and the trial balance is the first tool for finding it. This lesson builds the May trial balance for Birchwood Bikes, explains what a trial balance proves and what it cannot prove, shows practical techniques for locating errors, and explains how to correct errors with correcting entries rather than by erasing or overwriting records.

Preparing a trial balance

A trial balance lists accounts in chart-of-accounts order (assets, liabilities, equity, revenues, expenses), with each balance in the debit or credit column according to the side on which it falls. It is dated at a point in time, usually the end of a month or year. The trial balance prepared directly from the ledger before any end-of-period adjustments is the unadjusted trial balance; lesson 6 prepares the adjusted trial balance, and lesson 7 the post-closing trial balance.

The totals agree at $67,850. Note that the trial balance total is not the same as total assets ($61,900). It includes revenues, expenses and dividends, which have not yet been closed into retained earnings, so it is simply the sum of all debit balances and, separately, of all credit balances. Note too that dividends sit in the debit column alongside expenses, because they reduce equity, but they will appear on the statement of changes in equity, not on the income statement.

# Build a trial balance from ledger balances and check it (illustrative)
balances = {   # account: (balance, normal side)
    "Cash": (37800, "Dr"), "Accounts receivable": (1000, "Dr"),
    "Supplies": (1500, "Dr"), "Prepaid insurance": (3600, "Dr"),
    "Equipment": (18000, "Dr"), "Accounts payable": (850, "Cr"),
    "Note payable": (20000, "Cr"), "Share capital": (40000, "Cr"),
    "Dividends": (500, "Dr"), "Service revenue": (7000, "Cr"),
    "Rent expense": (2000, "Dr"), "Wages expense": (3100, "Dr"),
    "Utilities expense": (350, "Dr"),
}
dr = sum(b for b, s in balances.values() if s == "Dr")
cr = sum(b for b, s in balances.values() if s == "Cr")
for acct, (b, s) in balances.items():
    print(f"{acct:<22}{b if s == 'Dr' else '':>9}{b if s == 'Cr' else '':>9}")
print(f"{'Totals':<22}{dr:>9,}{cr:>9,}")
print("In balance" if dr == cr else f"Out by {abs(dr - cr):,}")

Cash                      37800         
Accounts receivable        1000         
Supplies                   1500         
Prepaid insurance          3600         
Equipment                 18000         
Accounts payable                     850
Note payable                       20000
Share capital                      40000
Dividends                   500         
Service revenue                     7000
Rent expense               2000         
Wages expense              3100         
Utilities expense           350         
Totals                   67,850   67,850
In balance

What a trial balance proves, and what it does not

A trial balance in balance shows that, for the entries posted, total debits equal total credits and the arithmetic of the balances is correct. It does not show that every transaction was recorded, that the right accounts were used, or that the amounts are right. Several kinds of error leave the trial balance in balance: a transaction never recorded at all; a transaction recorded twice; an entry posted to the wrong account on the correct side, such as rent recorded as wages; an entry with the wrong amount on both sides; and offsetting errors that happen to cancel. These are found by other means, such as bank reconciliations (lesson 10), customer and supplier statements, review of unusual balances, and analytical comparison with prior months or budgets.

Locating errors when the totals disagree

When the columns do not agree, work systematically from the summary back to the source. First re-add both columns of the trial balance. Then check that each balance was copied correctly from the ledger and placed in the right column; a balance in the wrong column produces a difference of twice the amount. Next, recompute each ledger balance. Finally, trace postings from the journal to the ledger, checking that each debit and credit was posted, to the right account, on the right side, and for the right amount.

Three quick tests save time. If the difference is an amount that appears in the records, look for an entry where only one side was posted. If the difference is even, halve it and look for a balance or posting of that amount on the wrong side. If the difference is divisible by 9, suspect a transposition, where two adjacent digits were swapped (for example 72 written as 27, difference 45), or a slide, where a number was written with the decimal point moved (for example 3,100 written as 310, difference 2,790). The divisible-by-9 rule works because swapping two adjacent digits or shifting a number by a power of ten always changes it by a multiple of 9.

# Error-finding hints from a trial balance difference
def hints(diff):
    out = []
    if diff % 2 == 0:
        out.append(f"look for {diff // 2:,} posted on the wrong side")
    if diff % 9 == 0:
        out.append("possible transposition or slide (difference divisible by 9)")
    out.append(f"look for a one-sided posting of {diff:,}")
    return out

for d in (700, 2790, 4500, 63):
    print(d, "->", "; ".join(hints(d)))

# Why transpositions give multiples of 9
for wrong, right in ((5400, 4500), (72, 27), (3100, 310)):
    print(right, wrong, abs(wrong - right), abs(wrong - right) % 9 == 0)

700 -> look for 350 posted on the wrong side; look for a one-sided posting of 700
2790 -> look for 1,395 posted on the wrong side; possible transposition or slide (difference divisible by 9); look for a one-sided posting of 2,790
4500 -> look for 2,250 posted on the wrong side; possible transposition or slide (difference divisible by 9); look for a one-sided posting of 4,500
63 -> possible transposition or slide (difference divisible by 9); look for a one-sided posting of 63
4500 5400 900 True
27 72 45 True
310 3100 2790 True

Correcting errors

How an error is corrected depends on where it is. If the trial balance was simply copied or added wrongly, fix the trial balance. If a ledger balance was miscalculated, recompute it. If a journal entry or posting is wrong, the professional practice is to leave the original entry in place and record a correcting entry, so that the audit trail shows both the error and its correction. Erasing, overwriting or deleting entries destroys the trail, and in accounting software, posted entries in a closed period are usually locked for exactly this reason.

There are two ways to write a correcting entry. One is to reverse the wrong entry completely and then record the right one. The other, often shorter, is to compare the wrong entry with the correct entry and record only the difference. Both leave the accounts correct; the second uses fewer lines.

The trial balance in a computerized system

Accounting software will not save an unbalanced entry, so a computerized trial balance always balances. That removes arithmetic and posting errors, but it makes classification errors, omissions and duplicates more important, because the comforting check of an unbalanced trial balance never appears. In practice, bookkeepers review a computerized trial balance by asking whether each balance makes sense: is any asset or expense showing a credit balance, or any liability or revenue a debit balance? Has any account moved sharply compared with last month or last year? Are there accounts with names like 'suspense', 'uncategorized' or 'ask my accountant' that hold unexplained amounts? These reviews are part of the month-end close.

A suspense account is a temporary account sometimes used to hold an amount whose correct account is not yet known, or to make a manual trial balance agree while the error is investigated. It must be cleared to zero before financial statements are issued. A growing suspense balance is a warning sign of weak controls.