Discusses step 4 of the Accounting Cycle, creating a trial balance, and its relationship to the general ledger before it and reporting processes after it.
If you’re interested in a more in depth look, have a look at the accompanying textbook Balancing Act: A Practical Approach to Business Event Based Insights, available for download. Specifically, look at Chapter 5, Accounting.
Change in Frequency
Steps 1 – 3 of the Accounting Cycle are done frequently; Step 4, producing the trial balance, only occurs when one is going to analyze the business by producing reports. Historically this step would have been done much less frequently than steps 1 – 3. As reporting becomes more and more frequent, at times now being done daily, this step might be performed as often as steps 1 – 3.
Why Trial Balance
Producing the trial balance is the act of simply taking all the ledger balances as of the end of some posting process, and listing those.
In modern systems, there really isn’t much of a need for the trial part of this step. Historically that would have meant listing all those balances in the ledger that were debits in one column, and all the balances that were credits in the other, footing the two columns and seeing that they equaled each other.
If they did not, it meant an error was made somewhere; either arithmetic, or otherwise such as a credit being treated as a debit. Today systems rarely have problems detected by this simple form of control.
But the balances in the trial balance are then used in the reporting process–the next step in the accounting cycle.
Watch the next week episode at Accounting Cycle Step 5: Create Reports
Watch the prior week episode at Accounting Cycle Step 3: Post to Ledger
Watch all episodes in order at the Conversations with Kip Playlist