What is Balance Sheet? A Complete Guide

The trial balance is a fundamental accounting tool that provides a snapshot of all the accounts in a company's general ledger at a given point in time. It serves as a critical check to ensure that the accounts are in balance according to the double-entry bookkeeping principle.

Section 1: What is a Trial Balance?

A trial balance is an internal report that lists all the accounts in the general ledger—including assets , liabilities, equity, revenues, and expenses—along with their ending balances. The purpose is to verify that the total sum of debit balances equals the total sum of credit balances.

This balance sheet is a prerequisite for preparing the official financial reports such as the income statement and balance sheet.

1.1 The purpose of the balance sheet

The main purpose of the balance sheet is threefold:

1. Verify Arithmetic Accuracy: It confirms that the accounting equation ( Assets = Liabilities + Equity) is in balance after all transactions are recorded.
2. Basis for Financial Reports: It is the starting point for setting up the income statement and closing balance sheet .
3. Financial Analysis: The balance sheet provides the basis for calculating important key figures such as working capital (current assets minus short-term debt).
4. Identify Errors: An unbalanced trial balance is a clear indication that an error has occurred in the accounting.

Section 2: How is a Trial Balance Prepared?

The process of preparing a trial balance follows a logical sequence based on the accounting cycle.

The steps are as follows:

1. Posting in General Ledger: All transactions from the journal are transferred to the respective T-accounts in the general ledger.
2. Calculate Balance for Each Account: For each account, the debit and credit sides are summed to find the final balance.
3. List Accounts and Balances: All accounts with their balances are listed in two columns: one for debit and one for credit.
4. Sum Columns: The sum of all debit balances and all credit balances is calculated.
5. Verify Balance: The two totals must be identical.

Example of Trial Balance

Account number	Account name	Debit (NOK)	Credit (NOK)
1500	Accounts receivable	50,000
1920	Bank deposits	150,000
2400	Accounts payable		30,000
2000	Equity		100,000
3000	Sales revenue		90,000
6000	Cost of goods	20,000
Total		220,000	220,000

Section 3: Trial Balance vs. Trial Balance

Although the terms are often used interchangeably, there is a technical difference:

• Trial balance: Shows the sum of all debit and credit entries for each account. Each account has both a debit and a credit amount.
• Balance Balance: Shows only the final balance for each account, either as a debit balance or a credit balance.

In practice, it is the trial balance that is most useful for preparing financial statements, including the closing balance at the end of the year. For a deeper understanding of the accounting cycle, see our article What is accounting? .

Section 4: Troubleshooting Imbalance

If the trial balance does not balance, it indicates one or more errors in the accounting. Common causes include:

• Single-sided posting: A transaction is only posted on one side (debit or credit).
• Incorrect amount: An amount has been entered incorrectly.
• Transposition error: Digits in an amount are swapped (e.g. 54 written as 45).
• Misplaced balance: A debit balance is incorrectly placed in the credit column, or vice versa.
• Rounding differences: Inconsistent rounding in accounting can create small differences that prevent balance.

A systematic review of journal entries and general ledger accounts is necessary to find and correct the error. Reconciling accounts against external sources can also help identify and correct errors that cause imbalances.