First, let’s explain what a trial balance is. Basically it’s a worksheet or report that lists all of the accounts in the general ledger, the monthly summary of account totals, and their year-to-date balances.

If you are using a computerized system, the trial balance can be generated automatically and printed. Even if the accounts are in balance, it still might not mean the numbers are accurate. We’re sure you’ve heard the standard phrase for computer data—“garbage in, garbage out.” The computer may prevent you from making a computer entry that is not balanced, but you can still enter inaccurate numbers.

You’ll get a much better idea of how a trial balance works and the components that make up this balance by doing one manually. So let’s close out Lisa’s Candle Shop books for the month of February using the manual method.

We’ve already reviewed the month-end totals for sales and many of the balance sheet account totals stay the same from month to month. Just to make things easier, we’re going to assume that Lisa found she had the same amount of inventory left at the end of February as she had at the end of January. We developed purchase and sales costs using $26,600, which was our total for Sales of Goods Sold developed in Chapter 17. We’ll assume Lisa has a monthly Salaries and Wage Expense of $3,800. Many of the other numbers you see we have developed just for this example.

Here’s a trial balance for Lisa’s Candle Shop dated February 28, 2010.

You can see that debit accounts are positive numbers, while credit accounts are negative numbers. The totals in the Debit and Credit columns are the closing totals of each account in the chart of accounts. At the top of the worksheet are the balance sheet accounts and at the bottom are the profit and loss (P&L) statement accounts.

We mentioned before that the final balancing act is to calculate Retained Earnings, which is the same as your net profit. That number is calculated using the trial balance by subtracting February’s year-to-date net profit from January’s net profit.

If all accounts are in balance, when you plug that number into the February column on the balance sheet your balance sheet should be balanced. If it isn’t, it means you’ve got to look for an error.

The simplest solution is a mistake in transferring the account closing balances to the worksheet or a computation error. If reviewing these possibilities doesn’t uncover the difference, you then have to go back and recheck your detail accounts.

You can see why it’s so important to be sure your detail accounts are accurate before closing those accounts and the sub-ledgers and transferring the numbers to the trial balance worksheet. The more careful you are when finalizing your sub-accounts and sub-ledgers, the more likely your trial balance will pass the test on the first try.

Note that when we plugged in the retained earnings figure in the balance sheet section, the debits and credits are in balance. The year-to-date account totals as of January 31 and February 28 are shown as zero. That also is a sign of success. Remember the formula for the Balance Sheet:

You can also see that the debits side will equal the credits side in the P&L section of the worksheet if you add the Retained Earnings to the debits. Bet you had your doubts this would work as you were learning how to make entries.

Here’s what a trial balance for February month-end would look like for Lisa’s Candle Shop if she uses a computerized accounting system.