Preparing general ledger and trial balance are two prime actions in the accounting cycle which are necessary for the preparation of year-end financial statements. The key difference between general ledger and trial balance is that general ledger is a set of accounts that contain detailed transactions conducted, while trial balance is a statement that records the general ledger ending balances.
CONTENTS
1. Overview and Key Difference
2. What is a General Ledger
3. What is a Trial Balance
4. Side by Side Comparison – General Ledger vs Trial Balance
5. Summary
What is a General Ledger
The general ledger is the principal set of accounts where all transactions conducted within the financial year are recorded. The information in the general ledger is derived from the general journal, which is an initial book for entering transactions. General ledger contains all the debit and credit entries of transactions and is separated with asset classes. (Assets, liabilities, equity, income and expenses)
E.g. Individual asset accounts such as cash, accounts receivables, prepayments, etc. will be recorded under the classification of assets.
For large scale businesses where many transactions are conducted, it may not be convenient to enter all transactions in the general ledger due to the high volume. In that case, individual transactions are recorded in ‘subsidiary ledgers’ and the totals are transferred to an account in the general ledger. This account is referred to as the ‘Control account’ and the account types that generally have a high activity level is recorded here.
Figure_1: Example of General ledger balance
What is Trial Balance?
The trial balance is a summarized worksheet which includes all ledger balances as at a particular point of time (usually the accounting year-end) with the intention of checking the mathematical accuracy of the ledger balances. All the debit balances will be recorded in one column with all the credit balances in another.
Trial balance provides all the ending balances in a single document at a glance, therefore, it is easy to use as a reference tool. It also assists in disclosing a number of possible errors in case of occurrence and helps to identify the type of journal entries that should be posted in order to correct the identified errors.
Main Purposes and Uses of a Trial Balance
- To use as a decision tool to ensure the mathematical accuracy of the ledger balances
If all the transactions for an accounting period are accurately recorded, the sum of the debit balances of the trial balance should be equal to the sum of the credit balances.
- To detect and correct errors in recording of financial information
Certain type of errors in the general ledger can be identified through the trial balance. They are,
- Errors of partial omission (Only the debit entry or the credit entry is posted in accounts)
- Errors of carrying forward (The ending balance is carried forward incorrectly)
- Errors of casting (The total of an account is more or less recorded)
In the event of an error, the amount causing the difference is put to the ‘suspense account’ until such time they are rectified. If the debit side of the trial balance exceeds the credit side, then the difference is credited to the suspense account and if the credit balance is greater than the debit balance, the difference is debited to the suspense account. Once the errors are identified, rectified and the trial balance tallied, the suspense account is closed since the balance no longer exists.
However, the following entries will not cause a discrepancy in the trial balance.
- Errors of principle (The entries are posted to the incorrect type of account)
- Errors of complete omission (The entries are completely omitted from the accounts)
- Errors of commission (An entry is posted in the correct type of account, but the wrong account)
- Errors of original entry (Incorrect amount is posted to the correct accounts)
- Errors of compensation (Incorrect entries in two or more accounts cancel out each other)
- Errors of complete reversal (Correct amount is posted to the correct accounts but the debits and credits have been reversed)
What is the difference between General Ledger and Trial Balance?
General Ledger and Trial Balance |
|
| General ledger is a set of accounts that record all the transactions. | Trial balance is a summarized statement that reflects the general ledger balances. |
| Purpose | |
| The purpose is to record the final entries of transactions. | The purpose is to check the mathematical accuracy of general ledger balances. |
| Account classification | |
| This is done according to the class of accounts | There is no classification of accounts. |
| Time Period | |
| This records transactions during the accounting year. | This is prepared on the final day of the accounting year. |
Summary – General Ledger vs Trial Balance
While the process of accounting used to be very time-consuming and costly, it can be now performed with less time and effort with the use of automated accounting software. It is important to understand the difference between general ledger and trial balance accurately since both represent important steps in the preparation of year-end financial statements. In case there are discrepancies between the debit and credit balances, they should be investigated, and corrective entries should be posted before proceeding to the preparation of financial statements.
Reference:
1. “General Ledger Definition – AccountingTools.” Definition – AccountingTools. N.p., n.d. Web. 09 Feb. 2017.
2. “What is the procedure for preparing a trial balance? | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 09 Feb. 2017.
3. “Trial balance errors – Questions & Answers – AccountingTools.” Accounting CPE & Books – AccountingTools. N.p., n.d. Web. 09 Feb. 2017.
4. “Errors not revealed by the trial balance.” Principles of Accounts for GCE O Level. N.p., n.d. Web. 09 Feb. 2017.
Image Courtesy:
1. “General ledger example” By Bgibbs (WMF) – Own work (CC BY-SA 4.0) via Commons Wikimedia