Trial Balance

What is a trial balance?

Trial balance (German: Summen- und Saldenliste, abbreviated SuSa) is a statement of all accounts of the financial accounting that have had postings in a period, with opening balance, debit and credit totals and balance. Debit and credit are the two sides of every account, on which double-entry bookkeeping records every transaction once on the left and once on the right. The balance is the difference between the two sides, that is, the closing position of the account. The list thus shows the complete posting status at a reference date, account by account and without aggregation. It resembles a bank statement that contains only one line for each account of the bookkeeping: opening position, total of postings on each side, closing position.

It is generated from bookkeeping, as a rule monthly and at the financial year end. From its balances arise the business management evaluation (betriebswirtschaftliche Auswertung, BWA) as well as the balance sheet and income statement of the annual financial statements. When an investor or buyer reviews the financial figures (financial due diligence), it is among the first documents requested. Through it, every aggregated figure can be traced back to the individual account.

Structure: what the trial balance contains

Each account appears in a line with account number, description and opening balance (balance brought forward). Next come the debit and credit totals of the reporting month, the debit and credit totals accumulated since the start of the year and the balance, marked as a debit or credit balance. Many programmes add prior-year values. The order follows the chart of accounts, in the case of DATEV (a widely used German accounting software and service provider) therefore SKR 03 or SKR 04, the standard charts of accounts. Customer and supplier accounts appear either in their own lists or aggregated via the control accounts for receivables and payables. No template to fill in is needed: the bookkeeping software generates the list and exports it as an Excel or CSV file.

Formula: balance = (opening balance in debit + total of debit postings) minus (opening balance in credit + total of credit postings); a positive value is a debit balance, a negative one a credit balance

Balance sheet accounts begin the financial year with the balance brought forward from the opening balance sheet, income statement accounts with zero. The balances of the income statement accounts therefore show the result accumulated since the start of the year, the balances of the balance sheet accounts the position at the reference date.

The control function and its limit

Because every posting has a debit and a credit side, the totals of all debit and all credit postings agree. The sum of all debit balances also equals the sum of all credit balances. Balanced does not mean correct, however. A posting to the wrong account, a missing invoice or a payment recorded twice leave the list in balance. Whether the balances are right is shown only by reconciliation with bank statements, open items lists and tax filings.

Reading the trial balance correctly: what reviewers look for

• Clearing and suspense accounts: Accounts such as cash in transit or payroll clearing should be close to zero at month end. High balances show movements that have not yet been assigned to a transaction.
• Shareholder current account: A debit balance is a claim of the company against a shareholder. It touches the maintenance of capital, because payments to shareholders out of the assets required to maintain the share capital are permissible only if there is a fully valuable repayment claim (Section 30(1) of the German Limited Liability Companies Act, GmbHG). If interest or repayment is not arranged at arm's length, the question of a hidden profit distribution also arises, that is, a benefit treated for tax purposes like a distribution.
• Other operating expenses: If a large part of the costs sits on collective accounts, the chart of accounts is too coarse for an analysis.
• Revenue accounts: Debit postings on revenue accounts point to credit notes or cancellations whose cause must be clarified.
• Residual balances without movement: Accounts that have carried the same balance for months often contain old items whose existence nobody can evidence any longer.

Why the trial balance is requested in due diligence

Financial reviewers do not rely on aggregated evaluations but build income statements, balance sheets and cash flows from the account balances themselves. The trial balance is the raw data basis for this. From it they determine one-off effects for the adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation excluding one-off effects). Added to this are debt-like items for net financial debt, that is, financial debt less cash. From the monthly balances they derive the average working capital, on which a working capital adjustment in the purchase agreement is based.

Requested are monthly lists as an evaluable file, supplemented by account ledgers for individual accounts. The reviewers reconcile the list at the financial year end with the annual financial statements, the monthly lists with management reports and the plan. Quality shows in the lists being available shortly after month end and the annual list after closing entries corresponding exactly to the annual financial statements. Clearing accounts are balanced, and every account is used in the same way over the years.

Worked example: extract from a trial balance

Extract from the trial balance of a software company at 30 June, accumulated for January to June, amounts in euros:

• Revenue: opening balance 0, debit 0, credit 1,800,000, balance 1,800,000 credit
• Trade receivables: opening balance 250,000 debit, debit 2,142,000 (invoices including 19% VAT), credit 2,000,000 (incoming payments), balance 250,000 plus 2,142,000 minus 2,000,000 = 392,000 debit
• Legal and consulting costs: opening balance 0, debit 186,000, credit 0, balance 186,000 debit
• Shareholder current account: opening balance 20,000 debit, debit 45,000, credit 5,000, balance 60,000 debit
• Cash in transit: opening balance 0, debit 310,000, credit 272,000, balance 38,000 debit

Four review questions arise from this:

• Receivables period: 392,000 ÷ 2,142,000 × 181 days = around 33 days; whether this fits the agreed payment terms is shown by the analysis of accounts receivable accounting
• Consulting costs: According to the account ledger, EUR 110,000 relate to a concluded legal dispute; if this is evidenced and non-recurring, an adjustment of earnings comes into consideration
• Shareholder current account: EUR 60,000 claim against a shareholder; the legal basis, interest and repayment are to be clarified before closing
• Cash in transit: EUR 38,000 is not assigned to any transaction, for example transfers between own bank accounts whose counter-entry is missing

None of these findings can be taken from the business management evaluation, which shows expenses and income only in groups. Investors and buyers therefore additionally request the trial balance.

Distinctions: SuSa, account ledger and main closing overview

• Account ledger (Kontenblatt): shows every individual posting of an account with date, voucher and offsetting account. The trial balance shows only totals and balance per account.
• Main closing overview (Hauptabschlussübersicht): carries the balances over, via adjusting and closing entries, into the balance sheet and income statement.

Common mistakes

• Delivering only the BWA. It answers no follow-up question about individual accounts and prolongs the review through further requests.
• Providing only a PDF. Reviewers then have to transcribe the figures; an evaluable file saves time and avoids transcription errors.
• Mixing preliminary and final versions. Lists before and after closing entries differ; without labelling, they do not match the annual financial statements.
• Leaving clearing accounts open. Unexplained balances are queried individually in the review and can point to missing postings.
• Shareholder account without an agreement. If a loan agreement, interest and repayment rule are missing, questions of capital maintenance and hidden profit distribution arise.

Frequently asked questions

Is a balanced trial balance proof of correct figures?

No. The equality of debit and credit follows from double-entry bookkeeping and says nothing about whether the right accounts were posted to. The balances become reliable only through reconciliation with external evidence.

What is a BWA with trial balance?

A common monthly package from the tax adviser: the business management evaluation together with the trial balance of the same posting status. The BWA aggregates the income statement accounts into a few lines with revenue, costs and preliminary result. The trial balance shows every individual account, including the balance sheet accounts. The BWA can be derived from the list, not the other way round.

For what period is the list requested in due diligence?

Monthly lists for the last two to three financial years and the current year are usual. For seasonal business and for the analysis of working capital, it is precisely the monthly values that matter.

How often should the trial balance be produced?

Monthly, together with the monthly closing. It arises without additional effort from the same bookkeeping and should be filed as a file after every closing.

May the tax adviser pass the list directly to investors or advisers?

Only with the company's consent. The tax adviser is bound to confidentiality; for a direct request by third parties, it needs a tax adviser power of attorney, which releases it from this duty to that extent.

The Roemer Capital view

For us, the trial balance is the starting point of the number work in a mandate. We have it given to us directly by the tax adviser under a power of attorney, together with the BWA and annual financial statements, and derive from it the actual figures for the financial model and equity story. In this way, every figure that an investor later sees comes from the same source that their reviewers also use.

Before a data room opens, we go through the lists of the last months account by account: clearing accounts, shareholder accounts, one-off expenses and residual balances without movement. What we find there can be clarified with the company in peace. If only the buyer's reviewers found it, it would become a negotiating issue.