Trial Balance Organization
In simple presentation format the T/B is laid out with all six types of accounts in the following order: See Lesson 1 for types of accounts.
As explained in Lesson 2, all debits MUST equal credits in the summation line. In addition the first three types of accounts represent the balance sheet and the last three identify with the income statement A.K.A. profit and loss statement.
Also notice three types of accounts carry ending balances that are debit driven and the other three have credit values.
Ending Balances in Each Type of Account
For the bookkeeper it is key that each respective type of account carry the proper value (debit or credit) as its ending balance. I explain this in detail in Lessons 4 through 8 and in Lesson 10. If you need a refresher, here are the links to each respective account type:
THE JOURNALS ACT AS THE SOURCE ENTRY POINT FOR RECORDING THE PROPER DEBIT AND CREDIT TO THE BOOKS OF RECORD. REVIEW LESSON 3.
I can’t emphasize enough the importance of making sure that in the aggregate each of the respective types of accounts end with the correct form of value i.e. debit or credit.
Assets – Debit Balance
Liabilities – Credit Balance
Equity – Credit Balance
Revenue – Credit Balance
Cost of Sales – Credit Balance
Expenses – Debit Balance
Proper Presentation of Each Account
When this report is printed it naturally identifies the name of the company, the report title and date in the heading.
Most trial balances use the five column presentation format as follows:
Account Type Account Group Account Name DR CR
The account type refers back to one of the six types of accounts. The account group identifies the major groups of accounts in each account type as follows:
Account Type Account Group
COST OF SALES
To take this to the next level, lets look at one group of accounts within the asset type of accounts:
Hopefully every reader caught the credit balance for the reserve account. This is an example of how a contra account balance is reported on the trial balance. If you are uncomfortable with contra accounts, be sure to review Lesson 12.
Also note that I did not sum up the debits and credits. If I had, they would not be equal. This is because this is just one subsection of the trial balance. Your debits and credits must be equal for the entire trial balance.
One more little note, when addressing contra accounts I discuss using parenthesis with contra accounts. Did you notice any parenthesis with the one above? Why?
The answer is that the trial balance is not a formal financial statement. It is an accountant’s tool only. The parenthesis around contra and atypical accounts are only used with the formal financial statements.
Full Detail Trial Balance Example
The following is a full detailed example of a contractor’s trial balance for illustration:
Key Symbol Description
C Equity (Capital Accounts)
COS Cost of Sales (Costs of Construction)
THE TOTALS IN THE TRIAL BALANCE FOR DEBITS AND CREDITS MUST BE EQUAL. THIS SUMMATION VALUE DOES NOT APPEAR ANYWHERE ON THE FINANCIAL STATEMENTS.
Remember I stated earlier that the trial balance is an accountant’s tool. But even as a bookkeeper you need to understand how to interpret the trial balance.
Analyzing The Trial Balance
If you look at the long list of accounts you should notice the preponderance of debit accounts over credit accounts. This is because revenue is almost one line item and all the costs to generate revenue are broken out to reflect cost of sales and expenses. This is normal in just about every business and industry.
Secondly you should easily identify the balance sheet types of accounts (located in the upper third) and income statement accounts in the lower two thirds. The income statement starts with the revenue types of accounts.
Did you notice any contra or atypical accounts?
There are four.
In the assets section which are normally debit balances, accumulated depreciation as a credit balance. You’ll see this in just about every trial balance for any business.
Over in the revenue section are two atypical accounts. When a contractor closes on a house he pays commissions, legal fees, local tax fees and often incentives to get a contract signed. In addition he’ll provide the buyer some allowances for items they bring to the deal such as appliances or personal work. The net effect is the true value of the contract and is referred to as net sales. Look at the financial statement illustration here:
Notice how closing costs and allowances are debit balances and are in parenthesis in the revenue section – Lesson 14. Also the lines of data follow the trial balance revenue lines of data.
The fourth atypical balance is in the equity section. Distributions are payments to the shareholders for the profits earned. This too is normal.
Now for the most important relationship issue. Do you see a ‘Current Earnings’ account in the equity section? You will never see this in a trial balance. Why?
Well all debits and credits on the T/B are a function (sourced) from the journals – Lesson 3. No journal has a ledger account available called ‘Current Earnings’. Therefore it is impossible to post an entry directly to ‘Current Earnings’.
Current earnings is a fill in the blank as a function of the income statement. To calculate the profit or loss year to date from a trial balance you simply add up all credits in the column from the revenue accounts through expenses including cost of sales. From this you subtract all debits from the three income statement type of accounts (revenue, cost of sales and expenses). If credits exceed debits there is a profit. If debits are greater than credits than cost of sales and expenses exceed revenue and there is a lost.
Whether a profit (credit value) or a loss (debit value) it is reported on the balance sheet in the equity section. Note that the balance sheet is not a trial balance. Again ‘Current Earnings’ is never on the trial balance.
For a more comprehensive understanding read Lesson 9 about financial statement relationships.
My final note relates the T/B to the chart of accounts. The difference between them is straight forward. A T/B looks like a chart of accounts – Lesson 11, but it includes the account balances (debits and credits).
The trial balance is an accountant’s tool that appears similar to a chart of accounts. However it includes the ledger account balances at the requested date. The T/B is organized by the six types of accounts, balance sheet types first followed by income statement types.
No matter what, total debits must equal total credits. ACT ON KNOWLEDGE.
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