How to Double Entry: Reviewing your financial records

Hello. We have been doing a series on ‘How to Double Entry’. If you’re just catching up, it’s a series of templates to guide you on how to maintain your day-to-day business financial records. And why you should opt to maintain records by transactions and not when you receive cash. Please catch up:

I – Why You Need to Know

II – How to Record Your Cash Transactions

III – How to Record Your Credit Transactions

IV – Why you Should Keep a Business Journal

V – Summarizing a month of business activity

Today let’s talk about the trial balance. If you’ve been with us this far, you can prepare as professional day-to-day financial records as anyone else. All that information is what will end up in your financial statements. But before you prepare them yourself, or get help, you have to check whether your records are accurate. It seems redundant. But you have to remember financial records need to be perfect, unlike people.

The good thing is that you don’t have to go back and check every line of record. Can you believe how tiresome that would be? Instead, the trial balance is used. It’s prepared from the final figures of your ledger. If you recall, these figures are the differences between the debit and credit transactions.

And it’s the easiest to prepare. You list your debit balances from your ledger accounts and sum them up. Separately, on another column, you sum up the credit balances from your ledger accounts. The magic happens after this. The totals of the debit and credit balances must be equal. This will confirm that your records are accurate. It’s the double entry magic. Every transaction has a dual effect so this is the result.

Let’s go over one example for the last time ever. Haha. What happens when you buy stock? You gain an asset (debit) but lose money (credit) by spending on said stock. This dual effect happens for every kind of business transaction. If there’s one you can’t figure out, just ask us on the comments section or social media.

What if your trial balance does not balance? It alerts you that a mistake must have been made somewhere up the road. You don’t need to panic. Everyone makes mistakes. You may have ommitted a transaction. You may have put down a wrong amount. Just as well, some put debit amounts on the credit side and vice versa. The important thing is that you are alerted and can rectify early.

Here’s the most sensible template: