Trial Balance: Study with Video Lessons, Practice Problems & Examples

The concept of T accounts is essential for tracking financial transactions, where debits and credits are recorded to determine account balances. A trial balance summarizes all accounts, listing assets, liabilities, equity, revenue, and expenses in a specific order. This ensures that total debits equal total credits, confirming the accuracy of financial records. For example, cash, accounts receivable, and accounts payable are key components in this process, leading to the creation of financial statements that reflect the company's position. Understanding these elements is crucial for effective accounting practices.

Using T-Accounts

Alright, now let's discuss the concept of T accounts and the trial balance. Alright, so we just went through a whole bunch of transactions in the formation of Clutch, right? But what we saw was a bunch of individual transactions. We saw this transaction affected cash and accounts receivable. This one, we bought some land. This one, we paid a dividend. Right? But we need to accumulate all those transactions together to get a final balance in an account. So what we're going to do is we're going to sum all transactions that affected that account to find a final balance. The way we're going to do that sum is we're going to use something called a T account. Okay? A T account is where we're going to take one account such as cash or accounts receivable or accounts payable or retained earnings, any account and we're going to set it up into this T format like you see at the bottom of the screen. And on the left-hand side of the account, we're going to have debits. On the right-hand side, we're going to have the credits to that account. And on the top, we're going to put the title of the account. In our example, we're going to deal with cash, so I'm going to write cash here. Okay? You don't have to put this title of debits and credits onto it once you're familiar with it. I'm doing it right here just so you understand that these are the debits and the credits. Okay? So throughout the Clutch example, we had multiple transactions that affected cash, right? We went through different transactions. Johnny Clutch put money into the company, we bought land, we got money from our customers, we bought supplies, and so forth. We received cash and we paid cash, right? So we want to find the final balance in the cash account. Okay? So if you go back, you're going to see that in journal entry A, B, E, F, and G. Back in our Clutch Tutoring examples, we were affecting cash, right? There was going to be either a debit or a credit to cash in those examples. So what we want to do is we want to bring all of that information into our T account for cash. Okay, so let's go ahead and do that right now. I've gone through already, and I got the numbers, but I want you to go back, go shuffle back to the other pages, and accumulate all the numbers where you saw cash. Okay, so the first one was in journal entry A, we had a debit of 50,000, right, we increased our cash by 50,000 when Johnny Clutch put the money in the company, and then in transaction B, right, I'll put in a little A right here so we know that was transaction A. In transaction B, we purchased land, so we paid out some cash to get land, right, so we're going to have 40,000 here for B, right? And then in transaction E, was it E? Yeah. And E, I believe is where we paid our tutors, right, and we paid them $3,000 for the month, 3,000 in transaction E. So that was a credit, right? And you can just see in the journal entries, we already did the hard work. Now we're just going back to the journal entries and say oh that one was a debit, oh that one was a credit, we're putting it all in one place, alright? The next one was in transaction F, we had accounts receivable that were paid to us, right? We received some cash from customers, so we would have right here $3,500 from F, right? That was a debit. We increased our cash. And last but not least in G, we paid $500 to our stockholder in a dividend, right? So we decreased by 500. So the last thing to do is to find our final balance in cash, right? So what we do, the debits increased cash, the credits decreased cash, right? So all we got to do is total it up. Alright. So we're going to start with 50,000. I'm going to pull out a calculator because it makes this easier. 50,000 plus 3500. Right? Those are our debits and now I'm going to subtract our credits minus 40,000 minus 3,000 minus 500 and it leaves us with 10,000, right and the last thing you do notice how I drew this line here that means that that is the end of the transactions. Now we want to put the final balance of cash. Cash has a 10,000 balance after we did this, right? It was $50,000 plus $3,500 minus $40,000, $3,000 left us with 10,000. Now is that 10,000, is that going to be a debit balance or a credit balance? It's going to be a debit balance, right? Cash goes up with debits and this debit balance of 10,000 signifies that we still have $10,000 in cash after all of these transactions, right? Johnny Clutch put in $50,000. We did all these things and we were left with $10,000 cash, Okay? And it's a debit, right? We expect asset accounts to hold a debit balance, right, because they go up with debits, so we would expect there to be some debit balance in cash. If there was a credit balance in cash, that means we have negative cash. That means we have I don't know. We have less cash than we even have at 0, right? We owe cash. That would be a pretty crazy situation. So we generally are going to see a debit balance in cash, okay? So I also wanted to say, let's find the final balance in accounts payable. Okay? So we dealt with cash. We found the final balance in cash. How about the final balance in accounts payable? Well, accounts payable, there was only one transaction, and that was transaction C where we bought supplies, right? We bought supplies on account, and they were $8,000. So over here, I'm going to do accounts payable and remember AP is accounts payable, AR accounts receivable, we can use these acronyms, and you're going to see them all the time. So AP is our accounts payable account and what were the transactions in there? We had a credit of $8,000 when we bought those supplies, right? So this was from journal entry C. We increased by $8,000 and that was it. There was nothing else. There were no other transactions, we didn't pay out any of this to decrease the balance, it sat at 8,000. So what you would do, you would just draw your line, you would total it up which there's nothing to total here and you'd be left with 8,000, right? And it's a credit balance, right? We have 8,000, there are more credits than debits, so it stays as a credit. And that makes sense, right? Accounts payable is a liability account, so we would expect it to have a credit balance, right? Liabilities go up with credits, so we would expect there if there's going to be a liability count that it would have a credit balance. Alright? So let's go ahead and pause here and then we'll move on in the next video.

Constructing a Trial Balance

Alright. So now we're ready to create our trial balance. The trial balance is going to list all the accounts and their final balances. Okay, so we would basically do what we just did with cash, with the T account, or what we did with accounts payable. We would do that for every account and we would find the final balance in every account. Now, our example is pretty simple, so there weren't too many accounts that got affected too many times. Cash was probably the most complicated T account that we were going to build, so if you wanted to go through, you could go by account-on-account and practice your T accounts to find these final balances. Alright? I'm going to show you the final balances here once we get down there. Alright? So what we do is we use these trial balances and what we call the adjusted trial balance to create our financial statements. Alright? So remember that balance sheet, the income statement, the cash flow statement, that's what we're all building up to, all of this work that we've been putting in, it's leading us to finally being able to show our users, our investors, our banks, our creditors, the position of the company, show them these financial statements. Okay?

So when we create a trial balance, we're going to show our accounts in a certain order. First, we're going to show the assets, then the liabilities, then equity, followed by revenue, and finally expenses. Okay? This is going to be the order of the accounts that we're going to show in our trial balance, and I've already listed them here. These are all accounts that we affected throughout our formation example for Clutch Tutoring. So notice what we've got here, we've got all these accounts right here, those are the assets, right? We've got Oh, you can't see that. Let me go, I'll do it on this side. So right here, that's assets right here. Right? Then we have well, we only had one liability. Then we had our equity accounts right here. And remember that these revenue and expense accounts, they are part of equity, right? All of the income goes into equity. Revenues and expenses go into equity, but we're just going to list them here separately, revenue and expenses, right? Okay. So we've got all our accounts listed and these are all the accounts that we affected throughout our example. Okay? So what we would do is we would find the final balance in every cash T up here, we did the cash T account, and we got a final balance of $10,000, right? So that's what we would put in here. The final balance of cash was $10,000 and then accounts receivable, we had a couple of transactions there, we had $5,000 owed to us, and then we received $3,500 of it, so there was only $1,500 left in accounts receivable and you could see that if you made a T account for accounts receivable and got the transactions, got the entries from our transactions. Supplies, we saw went up to $8,000. Land had a value of $40,000, alright? And those were all debit balances, right? Those are all assets, so we could expect them to have a debit balance. Next, we have a liability, accounts payable, right? And this accounts payable account had $8,000 in it, but this is a credit balance, right? Because it is a liability, we would expect a credit balance. Alright. And now equity accounts. Well, common stock when Johnny Klutch started the business, he put $50,000 into the business. Let me get out of the way for the rest of these. Dividends, the next one dividends, right, we paid dividends of $500, and that was a reduction of equity, right? We paid that out of our equity, this $500, so it's going to be a debit there in our Equity account. Next, we have revenues, we held those reviews, and we earned $5,000 in revenues and our wage expense, right? And that was a credit because revenues go up with credits and our wage expense was $3,000 that we paid to our tutors. Okay? So this is our last check to be able to make sure that everything is correct, and we didn't make any errors, we're going to total up all the debits and all the credits, alright? I'm going to start with the credits because there are fewer numbers there, but let's go ahead and do that. We've got $8,000 plus $50,000 plus $5,000 gets us to a total of $63,000 down here, right? There's $63,000 total credits and our debits should hopefully equal the same amount, $10,000 plus $1,500 plus $8,000 plus $40,000 $3,000. There it is. $63,000. So the debits equal $63,000, credits equal $63,000. That's a good sign that we've done everything correctly here, okay? So that's always a good check to be able to check whether your debits equal your credits, whether your assets equal your liabilities plus equity, if there's something wrong there that means you've made an error somewhere and you can go back and check your work. Okay, so this is our trial balance, and with this information, we could be ready to make our financial statements, alright? We would take our assets and we would show those as the assets, we would show our liabilities, we would show our equity, but what we have here is what's called an unadjusted trial balance, okay? In further units, we're going to talk about adjusting entries. Entries that we're going to. But as of now, this would be a trial balance that we could go ahead and make journal entries or, excuse me, make financial statements out of.

In the future, we're going to learn about adjusting entries and the adjusted trial balance. Don't worry, it might sound scary right now, but they're not that difficult. Alright? So let's go ahead and pause here, and we'll move on to the next video.

Here’s what students ask on this topic:

What is a trial balance in accounting?

A trial balance is a financial report that lists all the accounts in the general ledger and their final balances at a specific point in time. It includes assets, liabilities, equity, revenue, and expenses. The primary purpose of a trial balance is to ensure that the total debits equal the total credits, confirming the accuracy of the recorded transactions. This balance is crucial for preparing financial statements, such as the balance sheet and income statement, which reflect the company's financial position.

How do you prepare a trial balance?

To prepare a trial balance, follow these steps: 1) List all accounts from the general ledger. 2) Record the final debit or credit balance of each account. 3) Arrange the accounts in a specific order: assets, liabilities, equity, revenue, and expenses. 4) Sum the total debits and total credits. 5) Ensure that the total debits equal the total credits. If they do not, recheck the ledger entries for errors. This process helps verify the accuracy of the financial records before creating financial statements.

What is the purpose of a trial balance?

The purpose of a trial balance is to verify the accuracy of the financial records by ensuring that the total debits equal the total credits. This balance check helps identify any discrepancies or errors in the ledger entries. Additionally, the trial balance serves as a foundation for preparing financial statements, such as the balance sheet and income statement, which provide insights into the company's financial health and performance.

What are T accounts and how are they used in accounting?

T accounts are a visual representation of individual accounts in the general ledger, used to track debits and credits. Each T account has a left side for debits and a right side for credits, with the account title at the top. They help in summarizing transactions and determining the final balance of an account. For example, a cash T account would show all cash-related transactions, allowing accountants to calculate the ending cash balance by summing debits and subtracting credits.

What is the difference between a trial balance and a balance sheet?

A trial balance is an internal report that lists all accounts and their balances to ensure that total debits equal total credits. It is used to verify the accuracy of the ledger entries. In contrast, a balance sheet is a formal financial statement that presents the company's financial position at a specific point in time, showing assets, liabilities, and equity. The balance sheet is derived from the trial balance and is used by external stakeholders, such as investors and creditors, to assess the company's financial health.