Skip to main content

3.6 Prepare a Trial Balance

What is a Trial Balance?​

A trial balance is a list of all accounts and their balances at a specific point in time. It verifies that total debits equal total credits.

Purpose:

  • Verify mathematical accuracy
  • Identify posting errors
  • Prepare for financial statements
  • Required step in accounting cycle

Trial Balance Format​

Standard Format:

Company Name
Trial Balance
Date

Account                          Debit      Credit
─────────────────────────────────────────────────
[Account Name (Number)]          €X,XXX
[Account Name (Number)]                    €X,XXX
...
─────────────────────────────────────────────────
Totals                           €XX,XXX    €XX,XXX

Preparing a Trial Balance​

Steps:

  1. List all accounts that have balances
  2. Enter debit balances in Debit column
  3. Enter credit balances in Credit column
  4. Total both columns
  5. Verify totals are equal

Example: Complete Trial Balance​

Using the transactions from Section 3.5, let's prepare a trial balance:

All Accounts with Balances:

Assets (Debit balances):

  • Cash (510000): €5,290
  • Equipment (223000): €13,000
  • Inventory (321000): €3,000
  • Accounts Receivable (410000): €1,755
  • VAT Recoverable (431000): €850

Liabilities (Credit balances):

  • Accounts Payable (400000): €1,000
  • VAT Payable (430000): €595 (€340 + €255)
  • Notes Payable (120000): €10,000 (from Transaction 1, Section 3.4)

Equity (Credit balances):

  • Share Capital (101000): €20,000

Revenue (Credit balances):

  • Service Revenue (701000): €2,000
  • Sales Revenue (700000): €1,500

Expenses (Debit balances):

  • Rent Expense (612000): €1,200

Trial Balance:

Le Petit Bistro
Trial Balance
November 30, 2024

Account                          Debit      Credit
─────────────────────────────────────────────────
ASSETS
510000 Cash                       €5,290
410000 Accounts Receivable         1,755
321000 Inventory                   3,000
223000 Equipment                  13,000
431000 VAT Recoverable              850
                                 ───────
Total Assets                                    €24,895

LIABILITIES
400000 Accounts Payable                    €1,000
430000 VAT Payable                           595
120000 Notes Payable                       10,000
                                 ───────
Total Liabilities                             €11,595

EQUITY
101000 Share Capital                        €20,000

REVENUE
700000 Sales Revenue                         €1,500
701000 Service Revenue                       2,000
                                 ───────
Total Revenue                                  €3,500

EXPENSES
612000 Rent Expense            €1,200
                                 ───────
Total Expenses                  €1,200

─────────────────────────────────────────────────
TOTALS                         €26,095    €26,095

Verification: Total Debits (€26,095) = Total Credits (€26,095) ✓

What a Trial Balance Proves and Doesn't Prove​

A Trial Balance Proves:

  • Mathematical accuracy (debits = credits)
  • All transactions were posted
  • No single-entry errors

A Trial Balance Does NOT Prove:

  • All transactions were recorded
  • Transactions were recorded correctly
  • Transactions were recorded in the right accounts
  • No compensating errors (errors that offset each other)

Common Errors Not Detected by Trial Balance​

  1. Omitted Transactions: Transaction not recorded at all
  2. Wrong Account: Transaction recorded in wrong account
  3. Compensating Errors: Two errors that offset each other
  4. Original Entry Errors: Wrong amount in journal entry (but debits still equal credits)

Correcting Errors​

If the trial balance doesn't balance:

  1. Check addition of trial balance columns
  2. Verify account balances in ledger
  3. Check posting from journal to ledger
  4. Verify journal entries (debits = credits)
  5. Review source documents

Luxembourg Compliance Note​

In Luxembourg, businesses must prepare trial balances:

  • At least monthly (for management)
  • At period end (for financial statements)
  • Before filing annual accounts
  • For audit purposes

Trial balances must:

  • Use PCN account classifications
  • Include account numbers
  • Be retained for 10 years
  • Support financial statement preparation

Think It Through​

A trial balance shows total debits of €50,000 and total credits of €49,500. What steps would you take to find and correct the error?