A trial balance is a schedule of debit and credit balances taken from all ledger accounts as part of the accounting process. Because every transaction has two sides, every debit has a corresponding credit and vice versa. Therefore, the overall debit and credit amounts are equal in the trial balance. A Balance Sheet, in simple words, is a financial statement that summarises the company's assets, liabilities, and capital as of a specific date.
The trial balance is generally prepared at the end of the month or at the conclusion of the accounting period, depending on the entity's requirements. On the other hand, the balance sheet is only prepared at the end of the accounting period. So, in this essay, we'll discuss the differences between a trial balance and a balance sheet, so read on.
Trial Balance vs. Balance Sheet
The trial balance determines the financial health of an organization. A trial balance provides a detailed description of income and capital accounts that are documented in a company's ledger. A trial balance, in other words, is a type of sheet used to record all kinds of debit and credit ledger balances. A trial balance is often prepared at the conclusion of the calendar year or the financial year. For example, cash accounts receivable, accumulated depreciation, equipment, unearned revenue, accounts payable, interest payable, salaries payable, capital stock, notes payable, salaries expense, income, advertising fee, depreciation expense, fuel expense, dividends, interest expense, long-term liabilities, rent expense, common stock, wages expense, utility expense, cost of goods sold, prepaid rent, leasehold improvements, accrued expenses, prepaid rent, leasehold improvements, accrued expenses, prepaid rent, leasehold.
In simple terms, a balance sheet can be defined as a financial statement used to report an entity's total liabilities, shareholders' equity, and assets at a specific date. A balance sheet shows what a business truly owns and owes and the capital that equity holders have invested in the company. A balance sheet is calculated by multiplying an entity's total assets by the sum of its liabilities and stockholders' equity. Do you know that a balance sheet is a financial statement that depicts the financial condition of an entity at a specific point in time? The elements of a balance sheet include cash, petty cash, inventory, supplies, land, buildings, plant and machinery, prepaid insurance, goodwill, trade names, other assets, notes payable, wages payable, accounts payable, interest payable, unearned revenues, taxes owed, bonds payable, common stock, retained earnings, and so on.
Difference Between Trial Balance and Balance Sheet in Tabular Form
Let's look at the top differences between the Trial Balance and the Balance Sheet:
|Basis of Comparison||Trial Balance||Balance Sheet|
|Meaning||A trial balance is a sheet that records all of the general ledger account balances.||The balance sheet is also known as a financial statement that shows an organization's overall assets and liabilities and the capital that its shareholders have invested in it.|
|Format||A trial balance should include specific debit (Dr.) and credit (Dr.) columns.||A balance sheet in its ideal format shows total assets, liabilities, and stockholders' equity.|
|Purpose||The trial balance's principal aim is to detect any numerical inaccuracies that may have happened during the double-entry accounting procedure.||The primary purpose of making the Balance sheet is to give an insight into the existing and potential investors about the financial well-being and position of a company.|
|Consideration of Opening or Closing Stock||Opening stock is taken into account in the trial balance.||The balance sheet considers closing stock.|
|Is it included in the financial statements or the final accounts?||No, financial statements and final accounts do not include the trial balance.||Yes. Financial statements and final accounts are incomplete without a balance sheet.|
|Type of Accounts Shown and Considered||Real, nominal and personal accounts are displayed.||Real and personal accounts are only displayed.|
|Use||Internally, the trial balance is solely used.||A balance sheet is only used for external reporting.|
An auditor's approval is not required for trial balancing.
|'s approval is required for the balance sheet|
|Source||The trial balance is created using general ledgers as a source or basis.||During the preparation of a balance sheet, the trial balance serves as a basis or source.|
|Application||The trial balance is used to check whether the debit balances' totals equal the totals of all the credit balances.||The balance sheet is used to assess an organization's financial situation as well as to display the correctness of all of its financial transactions.|
|Recurrence||The trial balance is created on a given date, which could be the end of a month, quarter, half-year, or year.||At the end of each fiscal year, a balance sheet is prepared.|
|Thumb Rule||There are no hard and fast rules when it comes to the organization of ledger balances.||Assets, liabilities, and stockholders' equity must all be properly organized.|
What is a Trial Balance?
The closing balance of all of the company's general ledgers is recorded in a trial balance. It's good to see if the credit and debit balances are equal. If the numbers do not add up, it means the books of accounts need to be verified to see if there was a mistake in the recording. According to double-entry accounting regulations, the debits and credits must be equal. To fully comprehend the importance of trial balance balancing statistics, we must first understand the notion of debits and credits.
The closing balances of the general ledgers are grouped in credit and debit columns of the trial balance is a trial balance. If every transaction was accurately documented, there should be a perfect match between the sum of credits and the sum of debits in the provided time period. If there is a mismatch, the difference value is adjusted, and the trial balance is balanced using the suspense account. The books of accounts would next need to be scrutinized to see where the error originated. This would be corrected, and the trial balance would be precisely balanced. Every month or quarter, trial balances are kept so that any inaccuracies in the accounting records can be recognized and addressed as quickly as feasible. It's a great technique to ensure that all accounting transactions are accurately recorded internally. It is the most straightforward approach to detecting any incorrect or inappropriate accounting entries.
The trial balance is helpful for the following purposes:
- Verifying the arithmetic accuracy of the accounts payable entries
- It can also assist in the detection of publishing errors.
- It's simple to compare current figures to previous data. A trial balance, for example, can be created for a specific time and then compared to the same period the prior year.
- It aids in the preparation of budgets and other financial projections for a given time period.
- It's the first phase in the auditing process, and it looks for problems before following the audit trail.
- The trial balance is often the initial step in the creation of other annual financial reports and statements.
- A balanced trial balance indicates the absence of clerical errors in the books of accounts.
- It's a convenient summary of the company's books of accounts that may be utilized for meetings and decision-making.
A trial balance cannot do the following:
- First, it is unable to determine whether an entry has been completely overlooked.
- It is unable to determine whether the incorrect amount has been entered as debit or credit.
- Double posted entries
- If the correct amount was posted in the wrong account
What is the Balance Sheet?
A balance sheet also has two columns: assets and liabilities, which must be balanced. It provides a comprehensive view of a company's entire financial situation and health. Take, for example, how a transaction might appear on the balance sheet. If a corporation took out a $10,000 cash loan from a bank, the money would be added to the cash account. As a result, the cash item on the asset side of the balance sheet would be increased by $10,000. It would also increase the debt item on the liabilities side by $10,000. This is a simplified representation of how a balance sheet is created. We need to know what assets and liabilities are to comprehend a balance sheet completely.
The limitations of a balance sheet are:
- The value of purchased assets is shown on the balance sheet. On the other hand, internally generated assets are neither valued nor listed on the balance sheet. This could be the product of an internal study or an in-house designed website or web platform.
- Even after depreciation, the value of internal assets such as machinery does not always reflect the asset's actual value after wear and tear.
- It's just a glimpse of the company's financial health at the end of the year. But, of course, the balance sheet will still look fine if the company has settled all of its debts by the due date, and one would assume that the company was in good financial condition that year.
Main Differences Between Trial Balance and Balance Sheet in Points
The main differences between trial balance vs. balance sheet can be summarised as follows:
- The trial balance is an internal financial statement that the company only uses. An external account is a balance sheet.
- The trial balance is split into two categories: debit and credit. Assets, liabilities, and shareholders' equity are the three components of a balance sheet. The equation assets = liabilities + shareholders' equity should always be maintained on the balance sheet.
- The closing balances from the general ledgers are listed in the trial balance. The trial balance is used as a source in a balance sheet.
- The trial balance is kept to ensure that financial records are accurate. In addition, a balance sheet provides stakeholders with an overview of the company's financial situation.
- An auditor's signature is not required on a trial balance, but it is required on a balance sheet.
- Every month, quarter, half-yearly, and annually, the trial balance is recorded, whereas the balance sheet is created at the conclusion of each financial year.
- A trial balance is known as a statement of the general ledger's debit and credit balances. The balance sheet is a statement of assets, equity, and liabilities.
- The closing stock is not included in the Trial Balance, and the opening stock is not included in the Balance Sheet.
- The trial balance evaluates the correctness of the recording and posting, whereas the balance sheet is generated to establish the company's financial situation on a given day.
- The Trial Balance is created after posting to the ledger, whereas the Balance Sheet is made after the Trading and Profit & Loss Accounts are completed.
- The Trial Balance is not included in the Financial Statements, but the Balance Sheet is.
- The trial balance displays the balances of all personal, real, and nominal accounts. On the other hand, the balance sheet shows the balances of the personal and real accounts.
- The trial balance is generated just for internal use. In contrast, the balance sheet is prepared for both internal and external use, that is, to notify outside parties about the entity's financial status.
A trial balance is a statement that includes both debit and credit balances, whereas a balance sheet is a statement that includes assets, liabilities, and stockholders' equity. The balance sheet includes opening stock but excludes closing stock, whereas the trial balance ignores opening stock and includes closing stock. Trial balances are not included in either the final accounts or the financial statements, whereas a balance sheet is included in both the financial statements and the final accounts. There are various differences between the two. Preparing a Trial Balance is not compulsory at all, but preparing a Balance Sheet is compulsory for every company. The Trial Balance is not read by the users of the financial statement or stakeholders, but they use the Balance sheet. The Balance Sheet stands at a specific date which is generally the end of accounting year whereas, the Trial Balance is prepared according to the needs of the organization.