Step-by-step guide
How to prepare a trial balance
A trial balance lists every ledger balance in a debit or credit column to check the arithmetic. Learn to build one and what it can and cannot prove.
Step by step
- Balance each ledger account. Work out the closing balance of every account in the ledger.
- Decide debit or credit. Assets, expenses and drawings are debit balances. Liabilities, capital and income are credit balances.
- List the balances. Enter each balance in the correct column of the trial balance.
- Total both columns. Add the debit column and the credit column.
- Compare the totals. If the totals are equal, the trial balance agrees. If not, there is an error to find.
Worked example
If total debits and total credits both come to RM75,000, the trial balance agrees.
Understanding the method
In double entry, every transaction has equal debits and credits. So when all the ledger balances are listed, the debit column must equal the credit column.
The trial balance does not create this equality. It shows whether the ledger has kept it.
It is a check of arithmetic, not of correctness. A trial balance can agree while the records still contain serious errors. It also gathers every balance in one list, ready for the financial statements.
The side of each balance depends on the account. Assets, expenses and drawings are debits. Cash, inventory, machinery, wages, rent and drawings sit in the debit column.
Liabilities, income and capital are credits. Trade payables, loans, sales and the owner's capital sit in the credit column.
A simple rule: what the business owns or spends is a debit, and what it owes or earns is a credit. So a positive bank balance is a debit and a bank overdraft is a credit.
Exam lists are jumbled, so classify each item by its nature. Discount allowed is an expense (debit). Discount received is income (credit).
Returns inwards are a debit. Returns outwards are a credit. Carriage inwards and outwards are both expenses (debits).
Here is an example at the year end. Capital RM40,000, cash at bank RM6,500, inventory RM9,000, trade receivables RM7,200, trade payables RM4,300, machinery RM25,000, sales RM60,000, purchases RM38,000, wages RM11,000, rent RM3,600 and drawings RM4,000.
Debits: 6,500 + 9,000 + 7,200 + 25,000 + 38,000 + 11,000 + 3,600 + 4,000 = RM104,300. Credits: 40,000 + 4,300 + 60,000 = RM104,300.
The totals agree. Drawings reduce the owner's stake but are still a debit, which trips up many students.
If the totals disagree, the difference gives clues. A difference that is twice a balance suggests an item on the wrong side. A difference divisible by nine suggests reversed digits, such as writing RM72 as RM27.
A difference equal to one balance suggests that item was left out of a column. Re-add both columns before searching further.
An agreed trial balance does not detect these errors. One is a transaction left out completely. Another is an error of commission (the right amount in the wrong account of the same type). A third is an error of principle (such as a machine bought and recorded as repairs). It also misses an error of original entry, a complete reversal, and compensating errors. This is why control accounts and reconciliations are still needed.
If you cannot tell which errors a trial balance will catch, one of our teachers can run through each error type with you using past-paper style questions. Book a trial class
Related skills
The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.
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