How to do a trial balance

A trial balance takes each general ledger account's balance at one date and sets it in a debit column or a credit column. Because double entry posts equal debits and credits for every transaction, the two columns should come to the same total.

It does two jobs. It checks the ledger's arithmetic, and it puts every balance on one page so you can review them before preparing a profit and loss statement or a balance sheet.

Choose a date that ends a period you report on: a month end, a quarter end or 30 June, which business.gov.au gives as the end of the Australian financial year.

A trial balance can only list what has been entered. Before you run it, bring every account up to the date you've chosen:

• enter the sales invoices, customer payments, supplier bills and supplier payments dated up to that day
• reconcile each bank account and business credit card with its statement
• count petty cash and record any spending from it
• clear what you can from any suspense or uncategorised account, and note what is left there.

With handwritten books, also work out each ledger account's balance: add up its debits, add up its credits, and take the smaller total from the larger. The balance belongs on the side with the larger total.

1. Run the trial balance report in your accounting software for the chosen date, or write out the list from your ledger in chart of accounts order.
2. Put each balance in the debit column or the credit column, not both. An account with no balance can be left out.
3. Check that every account with a balance is on the list, including loan and card accounts, which are easy to miss in a handwritten list.
4. Total each column.
5. Compare the totals. If they agree, go on to the review. If they don't, find the difference before going any further.

When the totals disagree, work through these checks in order. Each one uses the difference itself to narrow the search.

1. Add both columns again, since an adding slip is easy to make in a handwritten list.
2. Read down the list and check that each balance sits on its usual side: assets and expenses as debits, and liabilities, equity and income as credits.
3. Halve the difference and look for a balance of that amount. A balance written in the wrong column pushes the totals apart by twice its value.
4. Look for a balance or an entry equal to the whole difference. It may have been left off the list, or posted to one account only.
5. Test for digits written in the wrong order, or a decimal point in the wrong place, using the check shown in the example below.
6. Compare each balance on the list with the ledger account it came from, and check the opening balances brought forward from the last period.

With accounts payable listed at its ledger balance, both columns come to the same total and the review can start. Here the ledger itself was right and only the list was wrong. Had the difference come from a one-sided entry in the ledger, the fix would be a correcting entry in the books.

Equal totals prove the ledger balances. They don't prove an amount went to the right account, or was entered at all. Read the trial balance line by line and ask whether each figure makes sense:

• Bank and credit card accounts match the balances in your latest reconciliations.
• Accounts receivable matches your list of unpaid customer invoices, and accounts payable matches your list of unpaid supplier bills.
• Suspense, clearing and uncategorised accounts are empty, or every amount still in them is explained.
• Regular costs such as rent show the expected amount for the number of months covered.
• Each asset, liability and equity balance is in line with last month, each income and expense balance is in line with the same date last year, and any big change has a reason you can name.
• No account shows a balance on its unusual side without a known reason.

Fix each error at its source where you can, for example by amending a bill that was entered with the wrong amount. Where the fix needs a journal entry, give it a description saying what was wrong and how the entry puts it right, and keep the document that supports it.

Then run the trial balance again for the same date and keep the final version with the period's working papers. For a company, the Corporations Act's meaning of financial records includes the working papers needed to show how financial statements were put together and what adjustments went into them, and the Act sets a 7-year keeping period that starts when the transactions are completed. Other business records generally have a 5-year keeping period, according to business.gov.au.

Year-end adjustments made by your accountant belong in your own ledger too. Post them, then take a final trial balance at 30 June: its asset, liability and equity balances carry into the new year, while the year's profit or loss moves into equity and the income and expense accounts start again from nil.

A trial balance each month, taken after that month's reconciliations, keeps any errors small and recent. The ATO suggests looking for mistakes whenever the figures don't add up, and a trial balance that won't agree is a clear prompt to do that.