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Trial Balance vs Balance Sheet Top 10 Differences You Must Know!

It is one of the important financial statements of the company. Balance sheet, cash flow documents and income statements will combine to get the financial position of the company. Based on insights the investors decide whether to invest in a particular company or not. Company’s accounting department will generate this internal report.

Trial balance is a compiled list containing all ledger account balances. It accommodates only personal and real accounts, nominal accounts are not included. The Trial Balance is not read by the users of the financial statement or stakeholders, but Balance sheet is used by them. However, the figures in the trial balance do not indicate accuracy, and it is entirely possible that an item or transaction may have been missed or a wrong expense account has been entered.

difference between balance sheet and trial balance

Trial balance consists of the list of general ledger accounts and their balances. From the three financial statements, profit and loss (P&L) and balance sheet are the two financial statements firms issue regularly. Trial balance is a complete listing of all ledger account balances at the end of a specified period. These account balances include all real, personal and nominal account balances impacted by journal entries.

Trial balance versus balance sheet – tabular comparison

Balance sheet is the reporting of the financial condition of a company by way of a financial statement. It is used for the evaluation of the financial position of an organization while depicting the accuracy of all financial affairs. In the previous example, we found out the end balance of the cash account and capital account. Therefore, these end balances will appear in the trial balance. According to the rule of debit and credit, we will debit the account when the asset increases, and we will credit the account when revenue is increasing. The balance sheet is a final report, while the trial balance is used to construct other reports.

Under the accounting principles known as GAAP, a company needs to prepare a balance sheet along with the income statement and cash flow statement. Trail balance, on the other hand, https://1investing.in/ is not a mandatory statement. Companies usually prepare it for their internal purposes only. The trial balance lists the debit and credit balances of the ledger accounts.

Trial balance is just a list of accounts and not regarded as a financial statement for the purpose of reporting. The balance sheet is structured in accordance with specific accounting standards, while there is no mandated format for a trial balance. The balance sheet provides valuable insights into a company’s resources and obligations. Through this information, users can make crucial decisions about their relationship with the company. The balance sheet also requires information from the trial balance to present those balances.

Cost Accounting MCQs

A trial balance and a balance sheet are two very important financial documents for any business. However, many differences distinguish these reports from each other. A trial balance is usually prepared as the first step towards preparing the balance sheet of the company. The trial balance usually includes a list of totals of accounts of the general ledger. The general ledger accounts should include the description of the account, the account number, and the final debit/credit balance.

  • When you begin learning a balance sheet, you will be given a trial balance and asked to prepare a balance sheet format using the accounts mentioned in the trial balance.
  • This starts from charting of all accounts to journalizing to posting to preparing income statement and finally financial statement .
  • Yes, it covers all about your business — i.e., what your company holds, what your company owes, each amount invested by the business owner, for every day.
  • It may be issued only for internal use, or it may also be intended for such outsiders as lenders and investors.

The basic information to prepare a trial balance is taken from the company’s ledgers. It is taken into account to ensure that, in the end, the total liabilities as against the total debit balances should be the equal amount. Balance sheet is prepared at the end of financial year to ascertain the financial position of an organization.

Difference Between Trial Balance

But, let us first discuss about the primary definition of trial balance and balance sheet. This account is settled within the accounting period and does not appear anywhere in the financial statements. Trial Balance vs. Balance Sheet –The trial balance is an internal document. And the balance sheet is prepared to disclose the company’s financial affairs to external stakeholders.

difference between balance sheet and trial balance

In contrast, the balance sheet also relies on those general ledger accounts. On top of that, it also requires information from other financial statements, for example, the income statement. The balance sheet is one of the fundamental financial statements prepared by companies. This statement differs from the other statements in various regards. These balances fall under three components, including assets, liabilities and equity.

What if debt side is not equal to credit side in trial balance. Trial Balance can be prepared as per requirement of the organization while the Balance Sheet is prepared at a particular date which is usually at the end of the accounting year. General ledgers act as sources while working on a trial balance.

So, if you make a sale and collect the cash, you would account for it as follows. So the company’s cash account will be debited and the sales account will be credited to record the transaction. It is this double entry of debit and credit that is the basis of the double entry accounting system. It is used to ensure that the totals of all the debit and credit balances are equal. A trial balance provides all the ending balances in a single document at a glance; therefore, it is easy to use as a reference tool. It also assists in disclosing a number of possible errors in case of occurrence and helps to identify which journal entries should be posted in order to correct the identified errors.

If every transaction was recorded properly, there should be a perfect match between the sum of credits and the sum of debits in the given time period. If there is a mismatch, an account called the suspense account is used to adjust the difference value and balance the trial balance. The books of accounts would then have to be examined to trace the source of the error.

Accuracy

However, in case of a further existence of a balance due to non-location of an error, the respective balance will be shown as an asset or a liability . Trading Account, Statement of Profit & Loss, Balance Sheet, and so on. Financial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . Trial Balance FormatTrial Balance has a tabular format that shows details of all ledger’s balances in one place. Trial balance is reported in columnar format with debit balances in the left column and credit balances in the right column, particular column is also added. Balance sheet includes only real and personal account balances.

Therefore, it is not necessary to take an auditor’s authorization to prepare a trial balance. Trial balance proves to be very crucial in detecting any mistake that could have taken place during the entry of the balances. However, it is not a part of the company’s finalized accounts. To efficiently record the complex and increasing transactions with other countries, the double-entry bookkeeping system came to being. In the modern-day world, a trial balance and a balance sheet are two types of double-entry bookkeeping procedures.

Assets are financial resources owned by an organisation which can be converted into monetary value. This includes all amounts that are payable and outstanding on the specified date. The net difference between the assets and liabilities represents the owner’s equity in the business. Trial balance is prepared to ensure the accuracy of the books of accounts.

After reading the above differences between trial balance vs balance sheet, you now know that both are very different from each other. Though trial balance may not seem as important as a balance sheet, it holds importance to the accounts department as it ensures the accuracy of the accounting system. On the other hand, the balance sheet holds importance to those outside the company as well, such as investors, analysts, and more. From the balance sheet statement, you receive the company’s assets, equity, and liabilities summary. The profit and loss account will give an overview of the revenue and expenses of a company. A balance sheet will transfer your company liabilities, assets, and shareholder equity at a certain point in time.

Balance sheet is prepared with the help of certain adjustments related to the business enterprise. Trial balance is prepared without taking into consideration any adjustments. In Trial balance, both capital and revenue accounts are written. Trial Balance can be prepared as per the requirement of the organization while the Balance Sheet is prepared at a particular date which is usually at the end of the accounting year. Trial Balance is prepared after posting into ledger whereas Balance Sheet is prepared after the preparation of Trading and Profit & Loss Account. Prepare horizontal balance sheet for the following trial balance.

On the other hand, a balance sheet reports the net position of a company’s assets and liabilities. The trial balance is prepared to check the error in the process of accounting but the balance sheet is prepared to show the true financial position of an entity. Well, it is kept by an accountant difference between balance sheet and trial balance or a bookkeeper who records the financial statements. These financial statements are then written into nominal ledgers and personal ledgers. There are three kinds of trial balances like the adjusted trial balance, the unadjusted trial balance, and the post-closing trial balance.

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