Why CPAs & Bookkeepers Should Avoid Trial Balances

Whenever someone gives me a trial balance and says, “here, please help me do a conversion,” I cringe. Let me tell you why I find them completely useless, and never prepare them, for any reason, even when I’m handling working papers.

In a nutshell, here’s why:

  • The only thing a trial balance does is raise questions. It’s the most unsatisfying read ever; in fact, there are times it can be very misleading.
  • Trial balances don’t assure you that the numbers on them made it to the tax return intact.
  • Trial balances don’t provide the GIFI coding necessary to prepare a tax return, and may or may not agree to the prepared schedules on the tax return.

There’s no guarantee that the account balances will match what’s being reported for tax purposes, which makes it necessary to see the Corporate Tax Return schedules.

In my opinion, the schedules for the tax return are much more valuable. They provide comfort and minimize the amount of work necessary to prepare next year’s return by starting with the figures actually reported for tax, instead of those left behind on the general ledger for interpretation, extra fee billing and manipulation to report for tax.

If you think you pay your accountant too much for corporate tax return preparation, compare your trial balance to your Schedules 100 and 125 on the Corporate T2, as well as your capital assets to the UCC schedule. Question your bank, receivables, payables and liability balances as to what they consist of. That’s why accountants prepare working papers. That breakdown is necessary to generate a proper conversion. The trial balance is like the top of the iceberg; it’s what’s under neath that iceberg that matters and can cost you.

Here is what a trial balance doesn’t show you (this is what’s under the water table, but should be in the working papers):

  1. It doesn’t show what the opening bank balance is, as well as outstanding amounts there are that should clear in the next days or months. I’ll need to know each one in order to reconcile the bank opening. The trial balance tells you what the book balance is, but not whether it actually reconciled to the bank. And, if didn’t, you won’t know what was left to be dealt with in the future.
  2. What’s included in Accounts Receivable and why, what has been included in income for a prior period not yet received, and/or what’s been accrued and received, or has been received but not yet billed.
  3. What’s included in prepaid amounts, for whom and why.
  4. What’s included in ‘accumulated amortization,’  which assets it relates to and whether or not the amount recorded is the same as what’s recorded for tax, or if there is a difference; is it a timing difference or a permanent difference?
  5. What’s included in accounts payable, to whom, when it’s due and why.
  6. If there is or isn’t a balance owing or receivable for a compliance account, as in GST/HST, payroll, WCB/WSIB or income taxes, and if that agrees to what’s been or not been reported to the authority in charge. Also, it doesn’t show you if there’s a difference, why and how far back it goes, and whether  it has been adjusted (YET).
  7. Whether the retained earnings are the sum of income and/or dividends paid out, or whether there’s been an entry made directly that hasn’t been accounted for like it should have been, as well as the tax paid, since inception of the corporation.
  8. Whether the trial balance agrees to what’s been reported on Schedule 100 and Schedule 125 for the prior year end, or whether, between the books and the tax return, there’s been some sort of adjustment not reflected on the books, yet shown on the taxes, and whether that’s timing or permanent in nature.
  9. How much was last year’s net income? It’s necessary to do a significant amount of calculating, instead of just reading the bottom of the net income (S 125) and comparing that to the change in retained earnings for net income on the balance sheet (S100).
  10. A general ledger tells the story. A trial balance tells you the ending, yet completely ignores all of the passion, hard work, energy and effort that went into the venture over the course of the prior year. It’s like reading the ending without reading the book.

Next time someone tries to fob you off with a trial balance, think of me and gather up your nerve and yell “I hate trial balances,” even if it’s only to yourself when they’ve gone. Who knows? Maybe if enough of us do that, the earth will wobble, and software developers will feel the shift.