close · Lesson 5 · 10 min
Trial balance to financial statements
The trial balance is the pipe. P&L, Balance Sheet, and Cash Flow are three views of the same pipe.
Dotted words have a reminder. Hover on a computer, tap on a phone.
From earlier
- TB
- P&L
- AR
- COGS
- Current Year Earnings
Trial balance
List every account with a debit or credit balance. Column totals must equal. That proves the ledger is in balance, not that it is right. Scan for: credit balances on expenses, debit balances on revenue, AR credits (overpayments or miscoded receipts), negative cash that isn’t an overdraft, and any remaining suspense.
Profit and Loss
Revenue − Direct costs = Gross profit. Minus operating expenses = Operating profit. Plus other income, minus other expenses and tax (if you post it) = Net profit. Xero: Reporting → Profit and Loss. Compare to last month and to the same month last year. A swing you cannot explain is a miscode until proven otherwise.
Balance Sheet
Assets = Liabilities + Equity, including current-year earnings. Read it for solvency (can we pay bills?), not just for the identity. Negative inventory, negative AP, and a credit card with a debit balance are almost always errors.
Statement of cash flows
Indirect method: start with net profit, add back depreciation, then show working-capital movements (AR, AP, inventory), then investing (equipment), then financing (loans, draws). If cash on the cash-flow statement does not agree to the movement in bank accounts, a balance-sheet account is mis-typed (e.g. a loan sitting in expenses).
Aged reports and the rest
Aged Receivables, Aged Payables, Inventory, Fixed Asset Reconciliation, and the Bank Reconciliation report are part of the close pack — not optional extras. 90-plus day invoices need a collection action or a credit note, not silence.
Check
Choices shuffle each visit. Misses send you back to the section. Look back clears the quiz so you can try again. Practice drills deal a new problem on try-again.
Choose an answer, then check.
This try
A trial balance that balances proves: