What does it mean if the trial balance total debit does not equal the total credit?
After posting all transactions from an accounting period, accountants prepare a trial balance to verify that the total of all accounts with debit balances equals the total of all accounts with credit balances. The trial balance lists every open general ledger account by account number and provides separate debit and credit columns for entering account balances. The Greener Landscape Group's trial balance for April 30,20X2 appears below. Show
The Greener Landscape Group Trial Balance April 30,20X2
Although dollar signs are not used in journals or ledger accounts, trial balances generally include dollar signs next to the first figure in each column and next to each column's total. Trial balances usually include accounts that had activity during the accounting period but have a zero balance at the end of the period. An error has occurred when total debits on a trial balance do not equal total credits. There are standard techniques for uncovering some of the errors that cause unequal trial balances. After double‐checking each column's total to make sure the problem is not simply an addition error on the trial balance, find the difference between the debit and credit balance totals. If the number 2 divides evenly into this difference, look for an account balance that equals half the difference and that incorrectly appears in the column with the larger total. If the Greener Landscape Group's $50 accounts payable balance were mistakenly put in the debit column, for example, total debits would be $100 greater than total credits on the trial balance. If the number 9 divides evenly into the difference between the debit and credit balance totals, look for a transposition error in one of the account balances. For example, suppose the cash account's balance of $6,355 were incorrectly entered on the trial balance as $6,535. This would cause total debits to be $180 greater than total credits on the trial balance, an amount evenly divisible by 9 ($180 ÷ 9 = $20). Incidentally, the number of digits in the resulting quotient—the quotient 20 has two digits–always indicates that the transposition error begins this number of digits from the right side of an account balance. Also, the value of the leftmost digit in the quotient— 2 in this case— always equals the difference between the two transposed numbers. Test this by transposing any two adjacent numbers in the trial balance and performing the calculations yourself. If the difference between the debit and credit balance totals is not divisible by 2 or 9, look for a ledger account with a balance that equals the difference and is missing from the trial balance. Of course, two or more errors can combine to render these techniques ineffective, and other types of mistakes frequently occur. If the error is not apparent, return to the ledger and recalculate each account's balance. If the error remains, return to the journal and verify that each transaction is posted correctly. Some errors do not cause the trial balance's column totals to disagree. For example, the columns in a trial balance agree when transactions are not journalized or when journal entries are not posted to the general ledger. Similarly, recording transactions in the wrong accounts does not lead to unequal trial balances. Another common error a trial balance does not catch happens when a single transaction is posted twice. The trial balance is a useful tool, but every transaction must be carefully analyzed, journalized, and posted to ensure the reliability and usefulness of accounting records. When the trial balance fails, accountants search for several kinds of errors that might cause the mismatch:
The trial balance test, incidentally, is not comprehensive error checking. Quite a few other kinds of errors can enter the system while and still leaving total-debits equal to total credits. As a result, the trial balance period calls for several different types of error checking besides the trial balance itself. At the end of a reporting period, accountants create a trial balance from all active accounts, to see if total Debits equals total Credits. An imbalance between totals signals an error in the system. [Photo: French tightrope walker Henri Rechatin balancing over Niagra Falls, 1967]
At the end of a reporting period, accountants create a trial balance from all active accounts, to see if total Debits equals total Credits. An imbalance between totals signals an error in the system. [Photo: French tightrope walker Henri Rechatin balancing over Niagra Falls, 1967] Explaining Trial Balance and Trial Balance Period in ContextSections below further define and illustrate trial balance in context with related terms and concepts from the bookkeeping, accounting, and business analysis, emphasizing four themes:
Business Case Essentials. The Best Selling Case-Building Authority in Print! Info Buy Now $39 Trial balance and trial balance period refer to an error-checking step in the accounting cycle. The terms have meaning only in companies that use a double-entry accounting system. Exhibit 1 below shows the significant steps in the accounting cycle. Firms complete the entire sequence once every accounting period. Here, note that accountants create a trial balance after posting all the period's transactions to the general ledger but before they transfer account balances to the period's financial reports. Trial Balance in the Accounting CycleExhibit 1 summarizes the sequence of steps in the Accounting Cycle. Exhibit 1. The accounting cycle. Transactions enter the journal as the first and second steps in the accounting cycle. The journal is a chronological record, where entries accumulate in the order they occur. Journal entries transfer (post) to a ledger, as the third step. Ledgers organize entries by account. The trial balance period is the final phase before publishing financial reports. Exhibit 1. The accounting cycle. Transactions enter the journal as the first and second steps in the accounting cycle. The journal is a chronological record, where entries accumulate in the order they occur. Journal entries transfer (post) to a ledger, as the third step. Ledgers organize entries by account. The trial balance period is the final phase before publishing financial reports. Contents
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ResourcesVisit the Master Analyst Shop. Download Ebooks & Software Today! Defining the Trial Balance PeriodBuilt-in Error CheckingThe trial balance highlights a well-known advantage of the double-entry system—built-in error checking.
When the trial balance does not balance, accountants try to find and correct the error immediately. If the reason for the mistake is obscure or not easy to find, however, they may create temporary adjustments in specific accounts. These restore the debit-credit balance temporarily while they search for the problem. Business Case Templates Because Sometimes You Need a Real Business Case! Info Buy Now $49 Page Top Contents
Where is the Trial Balance Period in the Accounting Cycle?What Happens When the Trial Balance Does not Balance?The trial balance period is the time between final posting to the ledger and transfer of account balances to financial statements. And, they also to search for errors that the trial balance overlooks. The firm would prefer instead to find mistakes itself during the trial balance period, then having external auditors find them after publishing. Total Debits Must Equal Total CreditsThe debit and credit totals in the trial balance must match to build the new Income statement and Balance sheet correctly. Also, they must unearth and correct other material errors underlying the account balances during the trial balance period, as well. Also, they must find and fix other material errors underlying the account balances during the trial balance period, as well. Trial Balance Period Also Includes ReconciliationNote that the trial balance period also includes reconciliation, the process of checking account balances against other sources. Bank statements should agree with ledger balances for cash accounts, for instance. And, liability accounts for bank loans should coincide with the lender's account statements, and so on. Good Reason for Rigorous Error CheckingBoard members and corporate officers have good reason to be very sure that error checking is rigorous and thorough. The firm's financial statements will appear, for instance, in the Annual Report to shareholders. These reports will also to go to tax authorities, regulators, bond-rating firms, and potential lenders. In all cases, they must include a written "opinion" by external auditors. And, in most cases, the only acceptable opinion is the highest possible rating, an Unqualified opinion. All involved want to avoid a lesser opinion, "Qualified," or even worse, "Adverse." Financial Metrics Pro Features the Info Buy Now $49 Page Top Contents
Building the Trial BalanceExample CalculationsThe trial balance calculation has in view every active account from the company's chart of accounts and general ledger. Trial balance results will look like Exhibit 4, below, mainly a table of accounts and account balances.
Note that this calculation does not require adding up every debit and every credit transaction from every account. The same results appear from merely adding the account balances from the general ledger, as in Exhibit 4. Example Account Balance: Cash on HandExhibit 2, below, helps explain the meaning of account balance in this context. Consider, for instance, just one account, "Cash on hand." Debit (DR) and credit (CR) transactions in this account have transferred from the journal to the general ledger. The ledger organizes transactions by account, in so-called "T-accounts," such as the example in Exhibit 2. Exhibit 2. A ledger T-account for account 101, Cash on Hand. This extract shows transactions and balances for one week in September. Like other asset accounts, Cash on hand is said to carry a debit (DR) balance. Note that total debits and total credits to a single account are not necessarily equal, either for the period or the account's entire history. Note especially that the difference between debit and credit totals across the account's history, represents the current account balance. Debit and Credit Impacts in Different Kinds of AccountsExhibit 3, below, shows that two of the five major account types show debit balances, whereas the other three account types show credit balances. Note that the five account types belong to two higher level categories. These categories are as follows:
Exhibit 3 also shows the impact of debit and credit transactions in each of account type. Debit (DR) Entry ... Credit (CR) Entry ...Positive BalanceAsset AccountIncreases (adds to) account balanceDecreases (subtracts from) account balanceDEBIT BALANCELiability AccountDecreases (subtracts from) account balanceIncreases (adds to) account balanceCREDIT BALANCEEquity AccountDecreases (subtracts from) account balanceIncreases (adds to) account balanceCREDIT BALANCERevenue AccountDecreases (subtracts from) account balanceIncreases (adds to) account balanceCREDIT BALANCEExpense AccountIncreases (adds to) account balanceDecreases (subtracts from) account balanceDEBIT BALANCEExhibit 3. The five major kinds of accounts. A positive balance in Asset or Expense category accounts a debitbalance. A positive balance in a Liability account, Equity account, or a Revenue account, is a Credit balance.End of Period Balances for All AccountsNow consider the account balances at the end of the period. At this point, all the period's transactions have posted to the ledger T-accounts. The "trial balance" account balance results appear below as Exhibit 4: Acct. NoAerofirma Corporation AccountsFiscal Year 20XXDebit BalanceCredit BalanceAsset Accounts - Current Assets101Cash on hand12,700 110Accounts receivable2,890 139Finished goods inventory3,830 163Factory manufacturing equipment10,560 Liability Accounts - Current Liabilities200Accounts payable 2,320234Payroll payable 3,720235Accrued fees 310260Bonds payable 1,400280Bank loans payable 3,100Equity Accounts320Owner capital 9,400350Retained earnings 7,400Revenue Accounts410Product sales revenues 13,000420Services sales 5,030430Rental property revenues 1,200450Interest earned revenues 300Expense Accounts - Cost of Goods Sold520Raw materials costs5,100 530Direct labor costs5,490 540Indirect labor costs3,730 550Manufacturing plant costs2,780 800Other expenses100 Total47,18047,180Exhibit 4. General ledger account balances for a company at the end of the reporting period. The trial balance test compares total debit balances total credit balances. In this case, the totals match, and the trial balance, therefore, does not reveal any accounting errors. (Note that for simplicity, this list of accounts is unrealistically short. Also for the sake of simplicity, the Exhibit does not include contra accounts, drawing accounts, depreciation expenses, or taxes. Passing the TestIn Exhibit 4, the trial sums in this example balance. That is because the total of debit balances equals the total of credit balances. The mathematics behind these results also mean that the sum of individual debit transactions equals the total of credit transactions. A successful trial balance notwithstanding, accountants will still check carefully for the other kinds of accounting errors that do not impact a trial balance. Once they correct all mistakes, the account balances are ready for publication in the period financial accounting reports (see the final section in this article). Business Case Essentials. The Best Selling Case-Building Authority in Print! Info Buy Now $39 Page Top Contents
Trial Balance ResultsCreating the New Income Statement and Balance SheetFor the most part, line items on the period's Balance sheet and Income statement are nothing more than account names. This reality should be evident in Exhibit 4 above, for instance. And, figures reported for each item are merely the account balances. In fact, when accountants are confident that the account balances are error-free, they build the new Balance sheet and Income statement directly from the list of accounts and their balances. Exhibit 5 and Exhibit 6 below show the results. Example: Creating the New Income StatementConsider first the revenue category accounts and expense category accounts. These are also known as "Income statement accounts," and they do indeed make up the Income statement contents. In the case of this simple example, using account balance figures Exhibit 4 above, the company's Income statement appears as Exhibit 5 below shows: Aerofirma Corporation Income StatementFor Fiscal Year 20XXRevenuesProduct sales revenues13,000 Services sales revenues5,030 Rental property revenues1,200 Interest earned revenues300 Total revenues 19,530ExpensesRaw materials costs5,100 Direct labor costs5,490 Indirect labor costs3,730 Manufacturing plant costs2,880 Total expenses 17,200Net income 2,330Exhibit 5. The Income statement results as a table of Revenue and Expense accounts in the Exhibit 4 trial balance results. Example: Creating the New Balance SheetThe remaining account categories (Asset, Liability, and Equity accounts) are called "Balance sheet accounts." These accounts and their balances do indeed make up the company's end-of-period Balance sheet, as Exhibit 6 below shows: Aerofirma Corporation Balance SheetAt the end of Fiscal Year 20XXAssetsCash on hand12,700 Accounts receivable2,890 Finished goods inventory3,830 Factory manufacturing equip.10,560 Total assets 29,980LiabilitiesAccounts payable2,320 Payroll payable3,720 Accrued fees310 Bonds payable1,400 Bank loans payable3,100 Total liabilities 10,850Owners EquityOwner capital9,400 Retained earnings7,400 NET INCOME2,330 Total owners equity plus inc 19,130Total liabilities plus equity 29,980Exhibit 6. The Balance sheet results as a table of Asset, Liability, and Equity accounts in the Exhibit 4 trial balance results. Net income, Retained Earnings, and Dividends on These StatementsNotice here that the "Net income" result from the Income statement appears in the current Balance sheet under "Owners Equity." When accountants finalize the Balance sheet, the net income value will indeed appear here, either as retained earnings or as dividends. When the trial balance balances, as in the previous section, the Balance sheet will also balance. And, the Income statement will show correct net income. Financial Modeling Pro Tutorial + Templates. The Living Model Makes Your Case! Info Buy Now $49 Page Top Contents Finding and Fixing ErrorsTrial Balance Finds Some But Not All ErrorsIf the "debit DR" and "credit CR" balance totals do not match in the trial balance exercise, there is an accounting error somewhere in the account balances. The firm will try to find the mistakes responsible for the mismatch, and correct them, before publishing financial statements. During the trial balance period, accountants will also search for and try to fix other kinds of accounting errors that the trial balance does not reveal. Any material errors in the account balances they do not find and fix before publishing financial statements may result in an external auditor's opinion that is either "Qualified" or "Adverse." The Trial Balance Reveals Some Kinds of ErrorsA mismatch between debit and credit totals in the trial balance usually means that one or more transaction postings from journal to ledger are either in error or missing. Accountants may ultimately have to examine every debit-credit pair of journal entries to find the mistake. There are, however, some well-known indicators for certain kinds of problems. These indicators help reveal specific errors without having to resort to a complete transaction-by-transaction review. For instance:
Making Account Balance AdjustmentsBecause the trial balance must balance, accountants may also adjust specific accounts, so that total "debit DR" and "credit CR" balances match. Adjustments are not so much a matter of fixing errors, as they are improvements in the accounting accuracy. The intent is to match revenues and expenses more correctly to the appropriate period. Adjusting entries to balance the trial balance typically impact two kinds of expense and asset category accounts: accrual accounts and prepayment accounts:
The Trial Balance is Blind to Other Kinds of ErrorsThe trial balance test does not detect the following kinds of errors.
Remaining questions for auditors and regulatorsIf such errors enter the financial statements, the issues for auditors and regulators then have to do with materiality and intent.
For this reason, company management and accountants will use the trial balance period to rigorously search out and correct all accounting errors—whether they impact the trial balance or not. What if debit is not equal to credit in trial balance?If a trial balance is not tallied, the value of the credit and the debit balances are not equal, then it indicates that there is something wrong with the trial balance and the debit and credit balances need to be checked individually to find out any discrepancies.
What happens if a trial balance does not match?If the trial balance does not agree, difference of the trial balance is placed to suspense account. Was this answer helpful?
Is the total of debit and credit of trial balance the same?The total of debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on double entry system.
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