Trial Balance: everything you need to know about stock

Everything in view: with a trial balance, you know exactly what property belongs to your company. All items, account balances, and debts are shown in this document, which must be regularly drawn up and updated. Your trial balance is also important for a correct balance sheet. That is why we’ll tell you exactly what a trial balance is and what to look out for when creating your own.

If your trial balance is incorrect or in­com­plete, it leads to incorrect annual financial state­ments. In the course of an audit, your trial balance will be the first point the auditor will work from. Should the tax office find any in­con­sist­en­cies, it may consider the ac­count­ing to be incorrect and sub­sequently cast doubt on all your annual financial state­ments. This can result in sub­stan­tial ad­di­tion­al tax payments, and – in the worst situ­ations – could be regarded as attempted fraud.

Your trial balance is comprised of the results of stock­tak­ing. This is something that needs to be done once a year. You count, measure, or weigh all tangible assets and list all tangible, fixed, current, and in­tan­gible assets as well as all debts. This makes the trial balance the basis for your proper annual financial state­ments. In this directory, you don’t just list all items by type and quantity, but also by value. Totaling all items results is the current total value of your company.

When you take over a company or create a new one, you need to create a complete stock count to determine the value of the company. You also need to take this step if your share­hold­ers change at all (either old ones leaving or new ones joining) or if you give up or sell the company.

Since you need to include both tangible and in­tan­gible assets in a physical stock count, there are different types of physical inventory: you use a physical inventory to record all physical objects in your company. Raw materials, equipment, and pro­duc­tion machines fall into this category, for example. These are counted, measured, or weighed. In ex­cep­tion­al cases you may also estimate, for example, whether large quant­it­ies of bulk material belong to the company. In addition to these items, other assets (or non-assets) are also included in the inventory, e.g. account balances and debts. To do this, you will need to carry out a paper inventory: you use documents (like bank state­ments) to check the book values, which should match your book­keep­ing results.

The inventory is divided into three areas:

• Assets
• Debts
• Equity capital

Assets include fixed and current assets. The former refers to all items that are per­man­ently part of your company, like land and machinery. Current assets, on the other hand, include items that are only in the company for a short period, like raw materials. This also includes finished or semi-finished products that are still in operation on the day of the stock count and have not yet been sold. The second point in your directory is debt: all li­ab­il­it­ies that you have not yet settled belong here. This also includes short-term invoices that still have to be paid. In addition, debt capital (e.g. bank loans) within the company counts towards the debt.

Finally, you calculate the equity capital from the two areas. This is your net assets, the dif­fer­ence between assets, and li­ab­il­it­ies. It is the capital that your company raises itself. If equity is positive, it appears as li­ab­il­it­ies in the balance sheet. If your debts exceed your assets and your equity is negative (i.e. missing), it belongs on the assets side of the balance sheet.

When designing your directory, you must also pay attention to certain struc­tur­ing rules:

• All items must be numbered through
• You also divide the assets in your list into current and fixed assets
• In addition, you should sort your assets by in­creas­ing liquidity: the items that you can next convert into credits are listed at the end
• You divide the debts into short-term and long-term, sorted by due date

Your list must be orderly, clear, and above all, veri­fi­able. Even un­in­volved third parties – e.g. auditors – must be able to trace your records. However, a well-struc­tured inventory list is worth­while for you, because it serves as the basis for your balance sheet. You are obliged to keep your inventory lists for at least 10 years.

The inventory is the basis for your balance sheet. This means that findings in the inventory list are included in the balance sheet, but not the complete inventory list. Whilst it is im­per­at­ive that you specify all items in­di­vidu­ally when listing assets and li­ab­il­it­ies, you can merge many line items in the balance sheet. They represent the assets in a com­pressed form.

The two documents also differ in structure: The inventory appears as a simple list, but a balance sheet appears as an account. This is a summary com­par­is­on of assets and li­ab­il­it­ies. The quantity spe­cific­a­tions of different items are also omitted – only values are relevant for the balance sheet. Finally, if the company is legally obliged to do so, balance sheets are also intended for pub­lic­a­tion.

To better un­der­stand the concept, we will give an example of exactly how to structure your inventory. Of course, each inventory must be adapted to the con­di­tions of the company. In this case, we show the inventory of a fic­ti­tious carpentry business.

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