How to read a trial balance, step by step

The trial balance is the only accounting document that fits on a few pages and still contains the entire situation of a company at a given date. The balance sheet says less, and the journal says far too much. That is why banks ask for it, why buyers ask for it in a due diligence, and why our report also starts from it.

What a trial balance actually is

It is the list of every account the company uses, each with four pairs of figures: where it started, how much moved during the period, how much moved since the beginning of the year, and where it ended up. Nothing more. All the difficulty comes from the fact that the four pairs have short names and look alike.

Opening balances (SI-D, SI-C)

What the account held at the opening of the financial year. An asset account has a debit opening balance, a liability account a credit one. If you see the opposite, either it is a posting error or the account is a dual-function one, and that deserves checking separately.

Movements of the period (RP-D, RP-C)

How much came in and how much went out through the account in the month or quarter under review. This is where the activity shows. A trade debtors account with large debit movement has invoiced a lot; with large credit movement it has collected a lot. The difference between them, accumulated, explains why the balance rises or falls.

Cumulative totals (TSD, TSC)

The opening balance plus all movements since the beginning of the year. It is the column most automated checks use, because everything else can be derived from it.

Closing balances (SF-D, SF-C)

Where the account ended up. These are the figures that reach the balance sheet and from which, in practice, every indicator is computed.

The four equalities that must hold

A correct trial balance satisfies four equalities on the grand total line. If one of them fails, there is no point analysing further: repair the accounting first.

1. Total SI-D = Total SI-C. At the opening, assets equal liabilities and equity.
2. Total RP-D = Total RP-C. Every entry had a debit and a credit.
3. Total TSD = Total TSC. A consequence of the first two.
4. Total SF-D = Total SF-C. At the close, assets again equal liabilities and equity.

In our report, this check is performed first, and if it fails the process stops. There is no sense in scoring a trial balance that does not balance.

The account classes, in ordinary language

A useful trick: subtract the total debit balances of class 6 from the total credit balances of class 7 and you obtain the gross result of the period. It is the first thing anyone does upon receiving a trial balance without the time to read all of it.

Three things visible straight away

1. Whether the company lives on its own money or on borrowed money. Compare the balance of class 1 (excluding loans) with total liabilities and equity. Below one third, dependence on outside financing is high and every rise in interest hurts.

2. Whether the money is locked up in goods or in customers. A large balance on 371 with modest sales means inventory that sits. A large balance on 4111 means you have sold but not collected. Both show profit in the accounts and no money in the pocket.

3. Whether the debts to the state are current. The balances in group 44 say more about the real health of a company than profit does. A company deferring its VAT has a liquidity problem no matter what the result line says.

What the trial balance does not tell you

It does not tell you the age of the receivables - a 400,000 lei customer balance looks the same whether it was invoiced last week or two years ago. It does not tell you whether the inventory still has value. And it tells you nothing about contracts signed but not yet invoiced. For those you have to open the account ledgers and ask people.

With that in mind, the trial balance remains the best starting point there is. Which is why the bank asks for it too.