In a previous article we discussed that each of the five basic account types is either in a debit balance (assets and expenses typically), or in a credit balance (liabilities, equity and revenue typically). We also learned that as a result of the fundamental accounting equation, the total of all debit balances in the accounts at any one point in time must be equal to the total of all credit balances. How is this end result of these postings reported? The general ledger is used to produce several standard reports.
The primary report, used by the bookkeeper in assessing the completeness and accuracy of the financial records for a business, is the trial balance report. A trial balance is a report reflecting all the account balances in a general ledger at a given point in time. It shows both the total of all debit balances and the total of all credit balances and is used for many purposes.
The fact that the trial balance is in balance (that total debits equals total credits), indicates that all transactions recorded and reflected in the trial balance have been posted with some accuracy. While this fact indicates that debits equal credits (a good starting point!), note that it does not mean that all transactions were either classified or reported correctly.
Another way in which a bookkeeper will employ a trial balance is to use it to identify obvious errors and/or accounts whose balances need to be investigated for possible adjustment. A review of the trial balance to identify such sources of potential adjustment requires that the bookkeeper use both common sense and a knowledge of the business itself ñ that is, that the bookkeeper ask the question, "Does this make sense?"
Support for Financial Statements
Finally, the trial balance will normally be used as the starting point in preparing the financial statements to be distributed to the owners/managers.
The flow from the general ledger to the trial balance to the financial statements can be summarized as follows