The primary report used by accountants is the trial balance. It is the job of the bookkeeper to make sure that it is in balance and that there are no abnormal values within the respective types of accounts. This lesson sums up the prior 15 lessons and illustrates the trial balance with a condensed version and an expanded version. Some insight into interpreting the trial balance is covered. Finally, it is explained why there is no ‘Current Earnings’ line on the trial balance (T/B). From this point the short hand of T/B is used to represent the term ‘trial balance’.
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.
Name of Account DR CR
Cost of Sales Z,ZZZ,ZZZ
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. This is explained this in detail in Lessons 4 through 8 and in Lesson 10. If you need a refresher, please review the following lessons for each respective account type:
Assets – Lesson 4
Liabilities – Lesson 5
Revenue – Lesson 6
Cost of Sales – Lesson 7
Expenses – Lesson 8
Equity – Lesson 10
THE JOURNALS ACT AS THE SOURCE ENTRY POINT FOR RECORDING THE PROPER DEBIT AND CREDIT TO THE BOOKS OF RECORD. REVIEW LESSON 3.
It can’t be emphasized 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, let’s look at one group of accounts within the asset type of accounts:
Account Type Acct Group Ledger Acct DR CR
ASSETS Current Cash on Hand ZZZ
ASSETS Current Checking – Ops ZZ,ZZZ
ASSETS Current Checking – PR ZZ,ZZZ
ASSETS Current Inventory Z,ZZZ
ASSETS Current Accounts Rcv ZZ,ZZZ
ASSETS Current Reserve – Bad Debt Z,ZZZ
ASSETS Current Prepaid Expenses ZZ,ZZZ
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 the debits and credits were not summed up? If they were, they would not be equal. This is because this is just one subsection of the entire trial balance. Your debits and credits must be equal for the entire trial balance.
One more little note, when addressing contra accounts, prior lessons 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:
NAILED IT CONSTRUCTION INC.
December 31, 2015
Acct Type Acct Group Ledger Name DR CR
A CA Cash on Hand 143
A CA Operating 41,717
A CA Payroll Checking 3,201
A CA Vendor’s Cash 988
A CA Work in Process 293,776
A CA Contract Rcvbl 53,200
A CA Prepaid Insurance 14,102
A Fixed Site Equipment 35,413
A Fixed Transportation 51,775
A Fixed Accmltd Dprc 77,203
A Other Land-Future Use 57,202
L CL Accounts Payable 28,747
L CL Credit Cards 16,482
L CL Accrued Payroll 7,011
L CL Progress Billings 267,413
L CL Taxes Due 18,408
L Long Term Truck Note 14,809
L Long Term Kubota Note 3,497
C Stock Common Stock 1,000
C Stock Capital Paid in Excess 19,000
C RE Retained Earnings 50,545
C RE Distributions 20,400
R Sales Contract Income 1,393,742
R Sales Closing Costs 67,411
R Sales Allowances 27,400
R Other Rev Compliance Fees 8,100
R Other Rev Interest 207
COS Direct Materials 402,888
COS Direct Labor 201,440
COS Direct Subcontractor 293,875
COS Direct Equipment 29,915
COS Direct Other 22,409
COS Indirect Project Mngmnt 172,644
COS Indirect Transportation 18,591
COS Indirect Insurance 17,996
COS Indirect Communications 7,040
COS Indirect Tools 6,738
E Staff Payroll 28,604
E Facilities Rent 13,400
E Facilities Maintenance/CAM 3,092
E Facilities Utilities 2,694
E Office Supplies 841
E Office Marketing 3,777
E Office Telephone/Fax 1,606
E Office Postage/Misc 492
E Insurance General Liability 1,119
E Insurance Umbrella 742
E Insurance Property 210
E Other Taxes & Licenses 3,091
E Other Prof. & Compliance 3,590
E Other Travel/M&E 1,205
E Other Other 1,437 –
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, it was 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 is one. 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:
Contracted Construction $1,393,742
Closing Costs (67,411)
Net Sales $1,298,931
Total Revenue $1,307,238
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 loss.
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.
A 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).
Summary – Debits and Credits with the Trial Balance
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.