A trial balance is a list of every account in the general ledger with its closing balance at a given date, arranged in two columns: debits and credits. Because every double-entry transaction posts an equal debit and credit, the two columns should total the same. If they do, the books are arithmetically in balance; if they do not, something has been posted incorrectly. The trial balance is also the starting point for preparing the profit and loss account and balance sheet.
What a trial balance looks like
A simplified trial balance for a small company at its year end might read:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Bank | 18,400 | |
| Trade debtors | 12,600 | |
| Equipment | 9,000 | |
| Trade creditors | 7,200 | |
| VAT liability | 3,100 | |
| Share capital | 100 | |
| Retained profits brought forward | 14,600 | |
| Sales | 96,000 | |
| Cost of sales | 41,000 | |
| Wages | 28,000 | |
| Rent | 9,600 | |
| Other overheads | 2,400 | |
| Total | 121,000 | 121,000 |
Assets and expenses normally carry debit balances; liabilities, capital and income normally carry credit balances. An account sitting on the "wrong" side, such as a credit balance on trade debtors, is worth investigating even when the totals agree.
What it proves and what it does not
A balancing trial balance proves only that debits equal credits. Several types of error leave it in balance:
- Omission. A transaction never entered at all, such as an invoice left in a drawer;
- Commission. The right amount posted to the wrong account of the same type, such as one customer's payment allocated to another;
- Principle. An item posted to the wrong class of account, such as a new laptop charged to repairs instead of equipment;
- Original entry. The wrong amount posted on both sides, such as £540 keyed as £450;
- Reversal. The debit and credit swapped;
- Compensating errors. Two separate mistakes that cancel out.
That is why a trial balance is reviewed alongside a bank reconciliation, a debtors and creditors listing, and a check of the VAT and payroll control accounts. Accounting software generally will not post an unbalanced entry, so in modern systems the useful work is in these reviews rather than in making the columns agree.
From trial balance to annual accounts
Accountants usually talk about three versions:
- Unadjusted trial balance. Extracted straight from the ledger at the period end, before any year-end entries;
- Adjusted trial balance. After year-end adjustments such as accruals and prepayments, depreciation, stock, bad debt provisions and the tax charge;
- Post-closing trial balance. After income and expense accounts are closed off to retained profits, leaving only balance sheet accounts to carry into the next year.
The adjusted trial balance is mapped into the statutory formats: income and expense accounts into the profit and loss account, the rest into the balance sheet. In the example above, sales of £96,000 less costs of £81,000 give a profit before adjustments of £15,000.
Why it matters for compliance
The Companies Act does not mention a trial balance by name, but it is the practical way to meet several obligations:
- Adequate accounting records. Every company must keep records sufficient "to disclose with reasonable accuracy, at any time, the financial position of the company at that time", including a record of its assets and liabilities;
- Keeping them. The Companies Act requires a private company to preserve its accounting records for 3 years from when they are made, and a public company for 6 years. HMRC's tax rule is longer: 6 years from the end of the last company financial year they relate to, so in practice most companies keep 6 years;
- Filing deadlines. A private company must file its accounts at Companies House within 9 months of the end of its accounting reference period, and its Company Tax Return is due 12 months after the end of the accounting period. Both are prepared from the year-end trial balance.
For management purposes, a monthly trial balance is the quickest health check on the books. A suspense account with a balance, an overdrawn director's loan account or a VAT control account that does not match the last return are all visible at a glance.
How to prepare one
- Post everything for the period. Sales, purchases, bank, payroll and journals;
- Reconcile the key accounts. Bank, debtors, creditors, VAT and payroll liabilities;
- Run the report. In Xero, QuickBooks or Sage this is a standard report at any chosen date;
- Review each balance. Check it is on the expected side, of a sensible size, and agrees to its supporting schedule;
- Clear suspense. Investigate and reallocate any suspense account balance before the period is closed.
Primary sources: Companies Act 2006 s386, s388 and s442, and HMRC guidance on company records and Company Tax Returns. Our purchase ledger guide covers one of the main feeder ledgers.
If your trial balance needs tidying before the year-end, our bookkeeping services team can reconcile the ledger, and our statutory accounts service takes it from trial balance to filed accounts.