What is a trial balance? A trial balance is an ordered list of all of the financial accounts contained in an accounting system’s ledger. This list will include the name of every financial account, the current value of that account, and the balance of that account. Each financial account will have either a cash balance or a balance due account. The cash balance is what is considered current when it is updated from the end of the month that includes the end of the fiscal year. The balance due account, on the other hand, is considered past due when it is updated from the end of the fiscal year that includes the last day of the prior year.
Definition of Trial Balance
- A trial balance is basically a spreadsheet list of all of the financial accounts included in an enterprise’s ledger.
There are two major purposes for maintaining a trial balance in accounting systems. The first purpose is to indicate that a company has enough funds to make its payments for all of its financial accounts at the end of the reporting period. This helps the management accounting team determine whether the company is over or under capitalized, which affects the way they report financial information to the CEO and shareholders. The second purpose of the trial balance is to show the CEO and shareholders that a company has enough spare cash to meet the requirements for payment as needed. If the company is overcapitalized, the trial balance will reflect that fact rather than the balance due or any other financial data. In this way, the CEO and shareholders will see that the company is financially healthy.
Why a trial balance be created.
Most large corporations will create a trial balance to be used when a large bill comes due. In this case, the corporation would open a new credit account and use the balance from this account to pay off the bill. At the end of the billing cycle, if a surplus balance exists, it can be returned to the account it was spent on. It is also possible for a company to use their surplus funds to make purchases which require a credit line.
Sometimes small companies will start out with a trial balance in an effort to get a feel for how their business will do without having the traditional funds set up. The trial balances will be monitored closely to make sure the business is profiting from the venture. After a period of time, the profit level can be adjusted so the company can re-evaluate the investment made. This type of trial balance will always be short-term and considered a pilot run to determine if the business can sustain itself on its own without outside financing.
Small businesses may also use trial balances to test new products or services before launching their main line of business. When a product is offered that has not been released in the store, the company can use a trial balance to introduce the product. This allows the company to attract new customers by offering a product they have not yet tried. Once the product is released and making sales, the company can determine whether or not the new product is worth the additional expense of opening a full production version. If the customer enjoys the new product, he or she will continue to use the trial balance as payment for the full retail cost of the product.
Businesses may also use trial balances to adjust inventory levels. When an item sells fewer items than expected, it can be removed from inventory and placed in the trial balance until it is sold to meet the company’s volume requirements. This will ensure the company receives its shipment of goods without going over capacity. Once the product is sold, the excess can be returned to the warehouses.
Many companies will use trial balances to collect outstanding invoices from credit card accounts. When invoices are paid in full but the outstanding balance continues to exist, the company can place the outstanding amount in the trial balance until it is paid in full. This ensures the company receives its invoice and does not receive collections calls each week. It also makes it easier for customers to track their accounts receivable by placing the amount owed in one location.
How much should a company charge for a trial balance?
In most cases, trial balances will not be used to settle a large debt or to cover expenses incurred due to extreme volume growth. Before a company charges for a trial balance, it must determine whether the potential revenue generated is worth the expense of the program. The decision to charge for a trial balance will be made based on the total amount owed on accounts receivable, the amount of time the program is active, the cost of procuring the balances and the costs of collecting the balances after the program is discontinued.
To maintain a trial balance in accounting systems, a company must first determine how much money is available in its current asset base. This may be determined by looking at current and historical account information. The second step is to add the current value of all future capital investments to the current value of the company’s existing accounts.
Once all of the accounts have been valued, the excess, or surplus, is applied to the remaining balance on all capital accounts. The trial balance will show a current net worth of zero dollars. This surplus is the difference between what is owed and what is still owed. Any change in the balance sheet results in a revision to the trial balance, which may require further adjustments to account for new investments or liquidations of assets.
The trial balance will not always be exactly zero. Sometimes the owner of one or more accounts will decide to sell their balances to minimize their taxes. When the company sells these accounts, it must pay the appropriate amount of federal tax. A trial balance adjustment may be required at this time if the IRS determines the company owes more taxes than it currently owes.
A trial balance adjustment may also be required if the company is undergoing a distribution of assets to avoid public notice of its bankruptcy. Under the laws of most states, distribution requires the approval of a judge. A trial balance adjustment allows the court to make an unbiased determination of the distribution amount. The judge may order an asset evaluation to determine the overall value of the portfolio. This examination of the worth of the portfolio determines the distribution amount.
A trial balance adjustment is not the same as a distribution of assets. A distribution can occur only after the distribution of the remaining assets has occurred. The trial balance simply reflects the total value of the accounts minus the current value of the account that are less than the balance.
Because all capital equipment and accounts receivable are always reflected in your balance sheet, it is easy to see how a trial balance adjustment can have a significant effect on your net worth. However, you should not rely solely on this figure when making financial decisions. The trial balance does not determine the value of the accounts receivable. The value of these receivables is determined by your company’s credit facilities, the cost of the assets on hand, the outstanding debt, and the company’s ability to generate future revenue. As you can see, it is very important to have a general understanding of your balance sheet before considering a capital distribution.