How to read a trial balance

A trial balance is a list of accounts, usually in chart of accounts order, with a date at the top and two amount columns. A chart of accounts usually groups accounts by type: assets, liabilities, equity, income and expenses. That order is useful, because accounts of the same type sit together.

In double-entry bookkeeping, every transaction is entered as debits and credits of equal value across the accounts it affects. A debit increases an asset or expense account and reduces a liability, equity or income account, and a credit works the other way. So asset and expense accounts normally show debit balances, and liability, equity and income accounts normally show credit balances. Drawings is the usual exception: it reduces equity, so it carries a debit.

Check the date first. Asset, liability and equity balances describe that day. Income and expense balances add up everything since the start of the financial year, which in Australia business.gov.au gives as 1 July, so a trial balance taken partway through the year holds the trading from 1 July to its date.

Start with the bottom half. Sales less all the expense lines gives the profit so far this year. Then read the top half for what the business owns and owes on the report date.

The two nets match, and they always will when the totals agree. The profit for the year so far has not yet been moved into equity, so the other accounts are out by exactly that amount. Seeing the same figure in both halves is a quick check that you have read the groups correctly.

Most accounts sit on their usual side. When one doesn't, the reason is often ordinary, but it needs a reason. These are common cases and what they usually point to:

In the example, two lines stand out. Bank is a credit, so the books show the account overdrawn; compare it with the bank statement for the same date to see whether that is real or the result of uncleared payments. Accounts payable is a debit, so the books say a supplier owes the business. Look in that account for a payment with no bill against it.

• Suspense and clearing accounts. Investigate unidentified items in suspense. A clearing account can hold known items awaiting settlement, such as card sales not yet paid out, so reconcile its balance to those items and follow up anything unexplained or overdue.
• Accounts you didn't expect to see, such as a new expense account someone created for a single bill.
• Accounts you expected but can't find, such as insurance in a year when you paid a premium.
• Round amounts in accounts that usually hold uneven ones, which often mark an estimate or a journal entry worth checking.
• Drawings, which business.gov.au describes as personal expenses paid from a business account; in practice it also covers money the owner takes out. A rising balance here is money leaving the business, not a business cost.

To see what makes up any balance, open that account in the general ledger, which lists each transaction behind it.

Many reports can add a comparison column. Use the same date a year earlier, so the income and expense accounts cover the same number of months.

Here cost of goods sold rose by more than sales, so less of each sale is left after the cost of the goods. Receivables and stock both grew by a far larger share than sales did, which ties up cash. None of that proves a mistake, but each is a question to answer before the figures go into a report.

A trial balance taken straight from the books is sometimes called unadjusted. At year end your accountant may make adjustments before the financial statements are prepared, and a trial balance taken after they are posted is the one the statements are built from. Check which version you are reading, especially when comparing with last year.

For a company, the Corporations Act counts among its financial records the working papers that explain how the financial statements are made up and what adjustments go into them. Keeping each version of the trial balance with notes on what changed between them is part of that trail.

A trial balance shows balances, not timing. It won't say when a supplier must be paid or when a customer will pay, which is the job of a cash flow forecast. It won't show which transactions make up a balance, which is the job of the ledger. And agreeing totals only show the debits and credits match.