How to read a Romanian trial balance

The trial balance - or, for short, the “balance” - represents the mirror of my company’s activity. All the operations that I run reach the accounting document called the trial balance. Sooner or later I will need to understand it in detail so that I can better coordinate my business - therefore I can already start by forming an overall impression on the types of information that the balance may offer.

At the same time, the balance is the mirror of my accountant's activity. This is exactly why I have to check it all the time. The most visible example is if I decide to close the company - when the lack of assets and the existence of very large debts allow late conclusions to be drawn: either not including all expenses in accounting, or leaving suppliers’ advances, or simply subsidising personal activities on the company’s back and with the money of the suppliers - all these negative habits will have repercussions in the end. It's good to understand this before I get to want to do exit and actually discover that I have very high taxes to pay, that I get cross-checks, that I have a tax record, that I can't open another company.

An extremely important first rule: I must ask my accountant to share with me, on a monthly basis, the balance in both synthetic format as well as, especially, in analytical format. It is important for me to be able to differentiate between the syntethic balance and the analytical balance:

  • the synthetic balance is the folded, compressed version, at the level of totals;

  • the analytical balance, unfolded, allows me to easily see if my accountant has worked correctly, if she has processed all the documents I have offered her - and has respected all accounting rules and regulations.

I’m starting by familiarising myself with the main categories of accounts. In the Romanian accounting there are seven main categories:

  • Class I represents the added value of the company, what it had accumulated since its inception. The name of this Class is Equity;

  • Class II is for fixed assets, meaning tangible and intangible assets which, in a similar manner, the company has accumulated during its existence;

  • Class III is for inventory. If my business is about trade, here is where I will see what is the value of the goods I have in my store. I can, thus, make sure that there is a correspondence between quantity and value. If my accounting firm also keeps track of the quantitative accounting of inventory, I must also ask for a quantitative-and-value inventory balance;

  • Class IV is for payables and receivables;

  • Class V is for cash liquidities;

  • Class VI is for expenses;

  • Class VII is for revenue.

Up until Class V I will find the actual account balances in the balance, in the column of ending balances. Class VI and Class VII do not have ending balances, because they close each month and go into the profit or loss account, coded 121.

A detailing of each Class would be useful. The first:

Class I. Equity

It is worthwhile asking for a balance with the account names on it, not just their numeric coding. For instance, if I want to see what profit or loss I have, I look at the account 121 - which is named exactly like this: profit or loss account. Two scenarios:

  • if I notice a balance on debit, i.e. if a number different than 0 shows up on the debit column, it means my company has a loss;

  • if I notice a balance on credit, i.e. if a number different than 0 shows up on the credit column, it means my company has a profit. This is the accounting profit that my firm has made.

Also in Class I it is important to analyse the retained earnings account, coded 117: if I observe a balance on debit, i.e. if a number different than 0 shows up on the debit account, this means that my firm has a loss which it has accumulated over the years, which sits as a heavy burden on my shoulders, and the company, at some point, risks getting stuck and not being able to function anymore.

Regarding the debt accounts, I must be extremely careful when looking at the bank loans account, coded 162. If I have taken loans in a foreign currency then I must ensure I have sufficient liquidity to cover the amount I have in the bank repayment schedule, multiplied with the currency exchange rate at the end of the month.

In the account for other loans and assimilated debts, coded 167, I will find the leases which I took to operationalise my firm’s activity: cars, equipment, machinery, installations. Also, I need to look at the bank’s repayment schedule, to see the value of the remaining leasing payment: the rest of the tranches to be paid multiplied with the currency exchange rate at the end of the month. In this account I will also find the guarantees to return to suppliers, for contracts with a duration longer than one year. One of the reasons why it is very important to ask my accountant for a monthly analytical balance, unwrapped, is that, for each leasing contract and for each guarantee to return, I will find an analytical sub-account in the analytical balance, for instance:

  • 16701 leasing contract 1

  • 16702 leasing contract 2

  • 16703 leasing contract 3

After in Class I of accounts I could see what is the added value of the company, which has accumulated since its establishment, in the next class I will see what are the fixed assets of the company:

Class II. Fixed assets

I have to start by asking the accountant for a register of fixed assets, because I have to see, concretely, what I have in the company. The value on the debit of the balance is where I will find the buildings (account 212), the cars (account 213), the furniture (account 214) - at the purchase value of the goods. If I deduct from the entire Class II the credit balance of the amortisation and depreciation accounts (account 280 amortisation for intangible assets and account 281 depreciation for tangible assets), I will obtain the unamortized value of the fixed assets that I still have to depreciate on costs - and that I must consider when I make the business plan, because, for me, this is a cost that I have to recover. If I sell at a lower price than the one which includes this depreciation component, without getting a margin to cover all expenses, then it will be difficult for me to go further, because, at some point, I will reach a stumbling block.

Class III. Inventories

In the category of inventory accounts I have the raw materials account (coded 301), the consumables account (coded 302), the materials in the form of small inventory account (coded 303), the goods purchased for resale account (coded 371), the work in progress account and, respectively, services in progress (coded 331 and 332, respectively), the finished goods account (coded 345).

These accounts always have debit balances. In them are found the inventories of finished products or unfinished production that I have in the company's patrimony, which I have not yet sold, I am going to sell - and from here I am going to obtain the source of financing to go on with the company.

Class IV. Receivables and payables

The most important account is the customers account, coded 411. Here are the invoices I have to collect. It is very important to have an analytical balance in order to understand this account: if I do not have the details of the invoices by age and the 3 years in which I had the right to sue the bad payers pass, I can say goodbye to those amounts, and I will reduce the profit with the respective amounts. So it is crucial to ask the accountant for the analytical balance, to reconcile with what I know is collected - and I must permanently and consistently act to recover the money.

A negative example with very serious consequences: if I have credit balances - i.e. 411 has a balance on the ending credit balance column - this means that I have collected and not issued an invoice, or the accountant has not entered the invoice in the accounts. What does this error mean? It means that, for the missing invoice, I did not pay the VAT, if my company is a VAT payer, I did not pay the profit tax or the income tax of the micro-enterprises - which generates costly increases and penalties, which I will also have to support from profit. If I did not foresee this risk as a margin, in the selling price of goods or services - the risk is that, at some point, I will have to pay increases and penalties, I will not be able to cover them, and they will accumulate in the loss I will record.

For accounts on credit - all accounts of suppliers, coded 401 - I also need to ask the accountant for an analytical balance, in which I will have, in a mirror, what I have to pay: I must ensure there are no bills double recorded, meaning that I benefited from a tax benefit, lowering the VAT, I also benefited from the expense, which, in the same way, attracts some consequences. I have to ask for the analytical balance for the suppliers and to reconcile the suppliers I still have to pay: for any discrepancy I have to ask the accountant and ask her for an account sheet, which we can reconcile together.

Also in the balance I find the account of advance payments to suppliers, coded 409. Again, I have to ask the accountant for an analytical balance and an account statement, which we should reconcile, because this account is what I paid to the suppliers as an advance, and they have not yet delivered the good or service - so I neet to ask for a cancellation invoice and be able to receive the good or service in the company's patrimony.

In the mirror, on the credit side, I find the account of advance payments from customers, coded 419, which is the account of advances received by my company from customers to whom I have not yet delivered the products or services. Likewise, I have to invoice it, because it must always correspond to the maximum duration term of the advance in the contract, because its non-recognition in the profit or loss account, at the maturity of the contract, also generates increases and penalties for non-declaration and non-payment of profit tax and VAT, which may fall under the scope of the Law for preventing and combating tax evasion.

Salary accounts, social security contributions, social health insurance, occupational insurance contribution, including payroll tax, all have ending credit balances and represent, in fact, the salary obligations I have to pay in the last month. If I ask the accountant for a balance in June, for example, I need to already have my payroll from June. What I have on the payroll as payment obligations must be reflected in the accounting.

To make sure that the taxes are declared correctly and that I do not have any missing tax return, I can ask the accountant, on a monthly basis, for a tax certificate. Thus, I will have the certainty that taxes were calculated correctly, that all tax returns were submitted on time - and I can prevent unpleasant situations that can even lead to blocked accounts.

The profit / income tax account, coded 441, always has a credit balance. The VAT payable account, coded 4423, is applicable to companies that are VAT payers - and, in the same way, always has a credit balance, which represents the amount I am obliged to pay.

The VAT receivable account, coded 4424, shows me the moment when the investments I have made in the company have exceeded the value of the VAT collected from the sales. The notion of Value Added Tax means that, if I do not make investments, I have VAT to pay.

I have to be very careful when I find in the balance the suspense account, coded 473, because this is a settlement account where I can find various issues from operations being clarified: unoperated documents, transactions without supporting documents etc. This account must always be zero, not with a very large balance. I must only allow the accountant to keep this account’s balance on zero.

I must also pay close attention to the sundry debtors account, coded 461, because of the following negative example: shareholders, who collect dividends but do not want to pay the dividend tax, distribute everything in this account, in the hope that no one will control them. But all the inspection agents that come - tax agency, antifraud - look first at this account, because this is money taken out of the company for which the respective shareholders did not pay tax. The inspectors will calculate taxes, increases and penalties, starting from the first amount that the respective shareholders have collected.

The sundry creditors account, coded 462, represents, in fact, the guarantees I have received, with a term of less than one year, and which I must, of course, return to the customers - or amounts received as loans from people who are not shareholders of the company.

Another account that must have a credit balance is the dividend payable account, coded 457. These are the dividends that I did not collect - and for which I paid or will pay the dividend tax.

Class V. Liquidities

Class V includes, among other sources of liquidity, all the balances I have in the bank. For each bank account I have opened, I have to find an analytical sub-account in the accounting records. When I look at the analytical balance, I will see that I have an analytical sub-account for each account in each bank. If I notice either that I don't have a balance or that the balance doesn't match, it's because the account statements weren't operated by the accountant - so I have to speak to her about it. This aspect reopens the discussion with the integration between the various accounting software in Romania and the banking platforms, so that the import of the bank statements takes place automatically, through API, as well as the reconciliation between the issued invoices and the receipts from the bank.

The petty cash in lei account, coded 5311, must always have my attention. The debit balance that I have in this account represents, in fact, the cash that I need to have in the company, at any time. If I don't have it, I have to pay tax on dividends. It is not a good idea to let this account accumulate debits, because I will pay increases and penalties on it for dividends collected but undeclared and untaxed.

Class VI. Expenses

If I look at the balance of this class, I will find an analytical account for each expense. It is good to look very carefully at the account for other third party services, coded 628, because it also attracts the attention of the control bodies. I must be careful that this account does not become a recycling point for invoices where there is not enough information to properly account them.

Everything that the shareholder buys in personal interest is accounted for in the account for other operating expenses, coded 6588. When an inspection comes, the tax office looks at the amounts in account 6588 and I will have to pay all taxes and salary contributions, both employee and employer.

Class VII. Revenue

In the revenue category, some of the accounts I need to keep in mind include:

  • if I have a trade activity: the account for the sales of goods purchased for resale, coded 707, will have the highest value;

  • if I provide services: the account for revenue from services rendered, coded 704, is the one that will have the highest value;

  • if I rent: I have to pay attention to the rental income account, coded 706;

  • if I have a production activity: the account for sales of finished goods, coded 701, will be of particular interest to me.

Class VII minus Class VI must always return the balance of account 121. In other words, if the income is higher than the expenses I will make a profit; otherwise, I will make a loss. It is good to think about what I will do next if I have a debit balance of account 121.