Trial balance and general ledger, explained simply
Financial statements are built from the trial balance, and the trial balance from the ledger. Diligence requests the monthly trial balances first because they allow the team to rebuild the statements, identify unusual months and trace any figure to the underlying entries.
A company that cannot produce reconciled monthly trial balances raises a reliability question about every other figure.
From transaction to financial statement
StructureEach layer summarizes the one beneath it; diligence works back down the layers to test a figure.
Worked example
Alder Creek’s income statement shows operating expenses of $9.0 million. The monthly trial balances show that “Miscellaneous expense” rose from $20,000 a month to $180,000 in December. The general ledger detail shows the December entries relate to a one-off settlement payment. The annual total alone would not have shown this.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Monthly data exposes seasonality, trends and one-off spikes that annual totals conceal, and allows any adjustment to be traced to source.
Red flags
- Trial balances that do not agree to the financial statements
- Large entries in suspense or miscellaneous accounts
- Many manual entries after month end