What is a Trial Balance?
The report lists the balances of a company at a certain point in time of all the general ledger accounts. The accounts that are reflected on the trial balance are all related to major accounting items such as equity, assets, revenues, liabilities, expenses, losses, and gains. The trial balance is generally used to identify at a certain point in time, the credit entries and the balance of debits from the transactions that are recorded in the general ledger.
Features of a Trial Balance
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. Along with this, the trial balance should include the accounting period of the report being created. The trial balance does not show each separate transaction, only the accounts total whereas the general ledges show all the transactions of the account. If any adjusting entries were entered, the trial balance should show the adjusting entry, the figures before the adjustment, and the balances after the adjustment.
What is a Balance Sheet?
The balance sheet is a key part of both financial modeling and accounting. The company’s total assets and how they are financed, either by debt or equity, are displayed in the balance sheet. The balance sheet can also be described as a statement of financial position or a statement of net worth. The fundamental equation that describes the balance sheet is Assets = Liabilities + Equity.
Features of a Balance Sheet
In a balance sheet, the assets and the liabilities are divided into two separate categories which include current assets or current liabilities and noncurrent (long term assets) or noncurrent liabilities. After the illiquid accounts or non-current accounts such as plant, property, and equipment (PP & E) and the long-term debt, more liquid accounts are placed such as cash, inventory, and the trade payables.
Difference between a Trial Balance and a Balance Sheet
Concept of Trial Balance
Trial balance is an internal report generated by a company’s accounting department that lists general ledger accounts as well as its balances. The columns in the trial balance show the credit balance and debit balance amounts.
The figures in these columns are subsequently summed up for showing that the consolidated credit balance is equal to the consolidated debit balance.
Importance of Trial Balance
Trial balance acts as the precursor to the preparation of financial statements as well as assessing the arithmetical accuracy. It is used for the verification of actual amounts from various ledgers. It also leads to the determination of the balances of all ledger accounts, which are eventually used for the financial statements.
It assists in the rectification of errors and makes due adjustments. Such adjustments are relevant only for the particular accounting year. Trial balance also helps in the comparative analysis with a previous year’s balances and the current one.
Concept of Balance Sheet
As an external reporting document, the balance sheet forms a part of the financial statement of a company. It is primarily a summary and report on the balances generated out of liabilities, assets and the equity accounts held by stockholders in the general ledger of a company.
Due to this fact, a balance sheet is also referred to as "Statement of financial position". This financial statement pertains to a particular date which is usually the accounting period’s last date.
Importance of Balance Sheet
The importance of balance as a part of a company’s financial statement can be understood along with the documents of cash flow and income statements. All of these combined together help in indicating the financial position of the company to the interested parties. It imparts the information about what the company owes and owns.
Such information is particularly crucial for such investors who seek to derive insights on the operations and financial health of a company for considering whether it will be a sound investment option.
Trial Balance vs Balance Sheet
The table below shows how to distinguish between trial balance and balance sheet.
Table 1: Trial balance and balance sheet difference
Trial Balance Example
Let, the following be the trial balance of a consulting company, XYZ.
Table 2: Trial Balance of XYZ
Table 2 shows that the credit equals the debit. 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.
Balance Sheet Example
Table 3: Balance sheet of XYZ
A balance sheet can be presented in two formats – (a) report form and (b) account form. Table 3 shows the balance sheet of XYZ in report form.
To know more about this, you can check various online study modules available on Vedantu’s website. Do not forget to install the app and boost your learning!
FAQs on Difference Between Trial Balance and Balance Sheet
1. What is a Balance Sheet?
A balance sheet is essentially a financial statement indicating a company’s liabilities, assets as well as equities held by shareholders within a specific duration. Balance sheet acts as the basis for computation of the rate of return and the evaluation of its capital structure.
2. What is Trial Balance?
Trial balance is primarily an accounting report that helps in balancing the general ledger accounts of a company. In a trial balance report, it can be seen that one column includes credit amounts, and the other, debit amounts. It has to be noted that the aggregate of these two columns should have to be necessarily identical.
3. What are the key elements of a balance sheet?
Some of the key elements of a balance sheet includes petty cash, cash, inventory, land, buildings, supplies, plant and machinery, trade names, goodwill, prepaid insurance, notes payables, other assets, accounts payables, wages payable, interest payable, trade names, taxes payables, unearned revenues, common stock, retained earnings, bonds payables, and so on. The balance sheet basically reports the entity’s total liabilities and assets and the stockholder’s equity on a particular date. To learn more about balance sheets, students can visit Vedantu’s study material on the balance sheets.
4. What is an income statement?
A financial statement showing the company’s income and expenditures is known as the income statement. It also displays if a company is making a profit or a loss. With the help of income statements, one can understand the financial health of his business. In order to understand the financial conditions the balance sheet and the cash flow statement also play an important role. The total expenses are subtracted from the total income in order to get the net income of the company which is displayed in the income statement.
5. What is the reason that a balance sheet is called a second trial balance?
Since the balance sheet is prepared with the closing balance of the ledger accounts at the end of the year therefore it is also known as the second trial balance. There are two sides to a balance sheet which are the assets side and the liabilities side. Accounts having debit balances are shown on the asset side and credit balances are shown on the liabilities sides and both sides should be matching.
6. What are the important limitations to the trial balance?
Some of the errors that one might face while the formation of a trial balance are-
A missing transaction that is not even journalized.
If an amount is written wrong on both sides.
If the amount was right but the posting was wrong.
A missing entry was not posted in the ledger.
Double posting of one single entry by mistake.
7. What are some main objectives of a trial balance?
Some of the main objectives of a trial balance are-
Ensuring if the posting is done correctly on the ledger.
To find out if there are any arithmetic errors.
To detect clerical errors such as mixing up of figures or fault in posting.
To help with the preparation of final accounts.
To have a summary of all of the accounting records.
