Think of this as a checkpoint to make sure your books are balanced before creating financial reports.
✅ Steps:
- Pull balances from the general ledger — check the "ending number" in each account.
- List them on the trial balance with debits on one side and credits on the other.
- Add them up.
- If debits = credits → good. If not → investigate!
🧾 Analogy:
It’s like checking that your scale is balanced before selling gold. If one side’s heavier, you missed something or made a mistake.
If debits ≠ credits, something’s wrong. Common causes:
- Debits and credits not correctly recorded
- Wrong account balances pulled from the ledger
- Ledger totals are incorrect
- Journal entries were wrong to begin with
🧠 Insight:
Even if your trial balance balances, errors can still exist if:
- You posted to the wrong account
- You made the wrong amount debit & credit but balanced them anyway
The trial balance checks mathematical correctness, not logical correctness.
This is where accounting becomes useful to outsiders (investors, banks, regulators):
📊 The 4 Financial Statements:
- Income Statement
Shows Revenue – Expenses over a period of time.
Tells you: Did we make a profit?
🧾 Like your monthly budget summary—how much you earned vs spent.
- Statement of Owner’s Equity
Tracks changes to equity from:
- Net income (from Income Statement)
- Owner withdrawals
- Additional investments
🧾 Like tracking the net worth of your business month-to-month.
- Balance Sheet
Snapshot of what the company owns and owes at a specific point in time.
Assets = Liabilities + Equity
🧾 Like your personal balance sheet:
Bank account + car value − credit card debt = your net worth.
- Statement of Cash Flows
Shows cash inflows and outflows from:
- Operating
- Investing
- Financing activities
🧾 Like checking your bank statement to see exactly how cash moved—not just profits, but actual money.
⛓️ Timeline Connection Between the Statements:
The diagram in your notes shows how these link:
- Start with last period’s balance sheet
- Add info from income statement (profit/loss)
- Adjust for owner’s equity changes
- Update for cash flow activity
- End with new balance sheet