What Is a Trial Balance & Why Should You Understand Yours?
If you've ever opened the reports section of your accounting software, you've probably noticed something called a Trial Balance. Perhaps you've clicked on it out of curiosity. Perhaps you've looked at the two columns of figures, wondered what on earth they mean and quietly closed it again. Or perhaps you've never looked at it because you've assumed it's something your accountant needs rather than you. That's understandable. A trial balance isn't particularly exciting to look at. It doesn't immediately tell you how much profit you've made, how much customers owe you or whether you've got enough money to pay next month's bills. It is one of the most useful reports produced by your bookkeeping software. You don't need to become an accountant to understand it, knowing what you're looking at can tell you a surprising amount about your business. Let's explain what a trial balance actually is, how it works and why it's worth paying attention to.
What is a trial balance?
In simple terms, a trial balance is a report showing the balances of the accounts recorded in your bookkeeping system at a particular date. Those accounts might include:
Your business bank account.
Sales income.
Business expenses.
Equipment and other assets.
Loans and other liabilities.
Money owed by customers.
Money owed to suppliers.
VAT and other tax balances.
Capital or shareholders' funds.
The report brings those balances together in one place. It displays them in two columns debits and credits. The total of the debit column should equal the total of the credit column. That's the basic principle behind a trial balance.
Before we look at why that's useful, we need to understand a little about how bookkeeping works.
A quick explanation of double-entry bookkeeping
Don't worry. We're not about to turn this into an accounting qualification. Understanding one simple principle makes the trial balance much easier to follow.
Modern accounting software generally uses something called double-entry bookkeeping. This means every transaction affects at least two accounts in the bookkeeping records.
Let's say you buy £500 of office equipment using your business bank account. Two things have happened.
Your business has acquired £500 of equipment.
Your bank balance has reduced by £500.
Both need to be recorded.
Or imagine you receive £1,000 from a customer for an invoice you've already issued.
Your bank balance increases by £1,000.
The amount that customer owes you decreases by £1,000.
Again, there are two sides to the transaction.
This is the foundation of double-entry bookkeeping and it's why a trial balance has two columns. Every debit has a corresponding credit, and the total value of debits and credits should agree.
But what do debits and credits actually mean?
This is where accounting terminology can become confusing. In everyday life, we tend to associate a debit with money leaving our bank account and a credit with money arriving. That's not how the terms work in double-entry bookkeeping. A debit doesn't automatically mean money going out. A credit doesn't automatically mean money coming in. They're simply the two sides of an accounting entry.
Different types of accounts normally carry balances on different sides.
Type of account | Normal balance |
Assets, such as bank balances and equipment | Debit |
Expenses, such as rent and insurance | Debit |
Liabilities, such as loans and money owed to suppliers | Credit |
Income, such as sales | Credit |
Capital and equity | Credit |
There are exceptions and adjustments, but this gives you a useful starting point. Once you understand that, the trial balance becomes considerably less mysterious.
Let's look at a simple trial balance
Imagine a small business with the following trial balance.
We've deliberately kept this example straightforward.
Account | Debit | Credit |
Bank | £8,000 | |
Equipment | £4,000 | |
Business expenses | £3,000 | |
Sales income | £10,000 | |
Business loan | £3,000 | |
Capital introduced | £2,000 | |
Total | £15,000 | £15,000 |
The first thing you'll notice is that the totals agree. £15,000 on each side. What's much more interesting is what those individual balances tell us.
The business has £8,000 recorded in its bank account.
It has £4,000 of equipment recorded as an asset.
It has incurred £3,000 of expenses.
It's recorded £10,000 of sales income.
It has a £3,000 loan liability.
£2,000 has been introduced as capital.
Already, we're starting to build a picture of the business.
The trial balance doesn't present that information as neatly as a Profit & Loss or Balance Sheet.
But the information is there and understanding it helps you see how the different parts of your accounts fit together.
Why is it called a trial balance?
Traditionally, the trial balance was used to check whether the bookkeeping entries had been recorded correctly from a double-entry perspective. If the total debits didn't equal the total credits, something had gone wrong. Perhaps an entry had been posted on only one side or perhaps an amount had been entered incorrectly. The trial balance helped identify that there was a problem to investigate.
Today, things are slightly different. Modern bookkeeping software is built around double-entry accounting. When you record a transaction in Xero, QuickBooks, FreeAgent or similar software, the system normally creates the necessary accounting entries automatically. So it's unusual for a modern accounting system to produce a trial balance where the two columns don't agree. That doesn't mean the report has lost its value. Far from it. The real value today is often less about checking whether the software can add up and more about checking whether the balances make sense.
What can your trial balance tell you?
This is where the report becomes genuinely useful. A trial balance gives you an overview of the balances sitting in your accounting records and those balances can raise some interesting questions.
1. Does your bank balance look right?
If your trial balance shows £25,000 in the bank but your actual bank statement shows £18,000, something needs investigating.
Perhaps the bank hasn't been reconciled.
Perhaps transactions are missing.
Perhaps something has been recorded in the wrong account.
Of course, the trial balance itself doesn't explain the difference but it gives you a reason to investigate. This is why regular bank reconciliations are so important.
2. Are there unexpected balances?
Imagine your business has repaid a loan in full, but the trial balance still shows £4,000 outstanding.
Perhaps some repayments have been recorded incorrectly.
Perhaps the balance includes interest or another amount that hasn't been dealt with.
Perhaps the loan hasn't actually been repaid in full.
The trial balance gives you the opportunity to ask the question. The same applies to VAT, PAYE, supplier balances, customer balances and other accounts. If a figure doesn't look right, don't simply assume the software must be correct. Find out why it's there.
3. Is money sitting in the wrong account?
Sometimes transactions end up somewhere they shouldn't. For example, you might see an unusually large balance in an account called Suspense. A suspense account is generally used to temporarily hold transactions or balances that need further investigation or allocation. It shouldn't become a permanent home for things nobody knows what to do with. If there's £6,000 sitting in suspense, that's worth asking about. Similarly, a director's loan account might show an unexpected balance. Perhaps money has been withdrawn from the company without being properly recorded as salary, dividends or repayment of money owed. The trial balance won't automatically tell you what's happened but it can help you identify where to look.
4. Are expenses and assets being recorded correctly?
Suppose your business buys £5,000 of equipment. Depending on the circumstances, that equipment may need to be recorded as an asset rather than simply treated as an ordinary expense. If it's been recorded incorrectly, your financial reports may not reflect the position accurately. Reviewing the balances in the trial balance can help highlight unusual amounts that deserve further investigation.
But... and this is important, not every incorrectly categorised transaction will be obvious. Which brings us to one of the biggest misconceptions about trial balances.
A balanced trial balance doesn't mean your accounts are correct
This is probably the most important thing to understand. A trial balance can balance perfectly while your bookkeeping contains significant errors. Let's go back to our equipment example.
Your business buys £2,000 of equipment. But instead of recording it as an asset, the payment is incorrectly recorded as general business expenses. The debit and credit entries still agree. Your trial balance balances perfectly but the transaction may have been recorded incorrectly. Your expenses could be overstated. Your assets could be understated. Your financial reports could be misleading.
The trial balance hasn't identified the mistake because the double-entry bookkeeping is still balanced.
The same problem occurs when transactions are missing entirely. If you forget to record a £3,000 supplier invoice, neither side of that transaction appears in the bookkeeping. The trial balance can still balance. But the accounts may be missing an expense and a liability.
A balanced trial balance doesn't prove that VAT has been treated correctly, bank accounts have been reconciled or every transaction has been allocated to the right place. Balancing is not the same as being accurate. That's why reviewing and understanding the figures matters so much.
How does a trial balance relate to your Profit & Loss and Balance Sheet?
You might be wondering why you need another financial report when you already have a Profit & Loss and Balance Sheet. The answer is that they're all connected. Your trial balance contains the account balances used to prepare those financial statements. Broadly speaking:
Your Profit & Loss shows income and expenses over a period, helping you understand whether the business has made a profit or loss.
Your Balance Sheet shows assets, liabilities and equity at a particular date, helping you understand the financial position of the business.
Your Trial Balance brings together the underlying account balances that feed into those reports.
Think of it as looking at the information behind the finished financial statements. If a figure on your Profit & Loss looks unusual, the trial balance can help you identify the account balance involved. If your Balance Sheet shows a loan, tax liability or director's loan balance you don't understand, the trial balance gives you another way to examine the information. From there, you can look at the individual transactions making up that balance. It's a useful route from the bigger picture down to the detail.
Why should a business owner look at their trial balance?
I genuinely believe business owners benefit from understanding the numbers in their business. That doesn't mean you need to become an accountant. It certainly doesn't mean you need to know how to prepare every journal entry. You should have an interest in what your financial reports are telling you. Your trial balance can help you ask questions such as:
Why does the company still owe this amount?
What makes up the balance in the director's loan account?
Why is there money sitting in suspense?
Has that equipment purchase been recorded correctly?
Does the bank balance agree with the reconciled statement?
Are the VAT and PAYE liabilities what we'd expect?
Have all the relevant expenses been recorded?
You might not know the answers immediately. That's fine. The important thing is recognising that there's something worth asking about. Understanding your accounts isn't just about reading figures. It's about knowing what those figures represent. The more familiar you become with your trial balance, the more useful it becomes.
Understanding your numbers gives you greater control
You don't need to understand every technical aspect of accounting to run a successful business.
The more you understand your financial information, the better equipped you are to make decisions.
Your Profit & Loss tells you about profitability.
Your Balance Sheet tells you about your financial position.
Your cash-flow information helps you understand the money available to your business.
Your trial balance helps you see the underlying account balances that contribute to those reports.
It's not necessarily the report you'll open first every morning but it's absolutely worth understanding. Sometimes the most useful question a business owner can ask is simply “That figure doesn't look right. What's behind it?” A good trial balance review can help you identify exactly where to start looking. That's why this seemingly technical report deserves a little more attention.
You don't need to be an accountant to understand your trial balance but understanding what those numbers represent can help you ask better questions, recognise potential problems and make more informed decisions about your business.
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