United States
Staffed with 100% US Employees

Financial Statements- Everything You Need to Know Part 1- Trial Balance

June 21, 2015 by Ed Becker

If you are around business people or accounting personnel you have heard of financial statements. Owning or running your own business usually requires producing these statements on a regular basis. If you are seeking financing, the lender is going to ask for certain financial statements in order to approve your request. So just what are these financial statements?

Financial statements show the financial activities and financial strength as well as the liquidity of a company on a given date. There are four main financial statements, these are what everyone is referring to when they say financial statements: Balance Sheet, Income Statement, Cash Flow Statement and Statement of Retained Earnings. There is also the Trial Balance that is not actually part of this group, but must be completed prior to preparing the final four statements.

Trial Balance refers to a list of the closing amounts from the accounting ledger. On a specific date, usually at the closing of an accounting period, the balances of each account is listed on the trial balance either as a credit or debit balance. Once each balance is listed in its respective debit or credit, the totals should be equal.

The purpose of this trial balance is to find and correct any errors prior to the preparation of the financial statements. If the totals do not equal the error can be rectified immediately. This is a very important step in the preparing of financial statements, if errors are found later it is a major task to redo all the financial statements. A trial balance does not find every error, if something was incorrectly entered but still has balanced debit and credit, that error will not be discovered in the trial balance. It also will not reveal if transactions were not recorded, because the credits and debits will still balance. It is imperative that transactions be correctly entered or recorded in the ledger accounts each and every time.

Once the trial balance is completed and the credits and debits are equal the financial statements can then be prepared, starting with the Balance Sheet. The trial balance and the balance sheet are not the same or interchangeable. They do have similarities, but the trial balance is not part of the main financial statements it is more of an internal checks and balances type of process in order to lead up to the creating of the financial statements.

In the next segment we will discuss the Balance Sheet in detail. What information it has included, what use it is for the company and others that read it as well as a general overview of how it is prepared.

Related Posts