Trial Balance vs Balance SheetKey Differences Between the Two
The timing of preparation is what makes them differ from one another.
To provide a faithfully represented balance sheet statement, the accountant must prepare first the trial balance.
The trial balance and balance sheet both summarize accounts and amounts that have a vital role in building financial statements.
The trial balance summarizes all the general ledger accounts, while the Balance Sheet summarizes all of the company’s assets, liabilities, and owner’s equity.
Trial Balance vs. Balance Sheet
The trial balance is used by organizations internally.
The balance sheet, on the other hand, is part of the financial statement report created for end users like investors, creditors, and other related parties that have to do business with the firm.
The trial balance is prepared to check whether the debit and credit balances are equal.
The timing of the preparation of the trial balance can be monthly, quarterly, semi-annually, or annually.
A Balance Sheet is prepared at the end of one accounting period.
The differences between Trial Balance and Balance Sheet are summarized as follows:
|TRIAL BALANCE||BALANCE SHEET|
|Records and Summarizes all closing accounts in a general ledger||It is where total assets, liabilities, and owner’s equity are recorded.|
|Verifies that the debit and credit balances are equal||It is where the company checks if the total liabilities plus equity balance is the total amount of total assets.|
|It is not part of the financial statement||It is one of the key components of a financial statement|
|Each account corresponds to its normal balances, either on the debit or credit balances||The three main account segmentation are Assets, Liabilities, and Equity|
|It is prepared to support the organization’s internal financial system||This report is prepared for external parties / end-users|
|The timing of recording can be monthly, quarterly, semi-annually, and annually||It is prepared at the end of the accounting period|
|It does not require the auditor’s signature||The Balance Sheet must be signed by the auditor|
|There is no specific rule in the format of recording in the general ledger||A standard format is followed in recording and reporting every relevant account.|
|It does not form part of the final accounts||It has a huge impact on the financial health of the company|
What is Trial Balance?
A Trial Balance is where the accountant checks whether the debit and credit balances are equal.
All related accounts that need to be closed in the general ledger are then transferred to the Trial Balance.
Using the concept of double-entry bookkeeping, every debit account should have a corresponding credit account recorded.
There is a possible error in accounting if the amounts of debit and credit are not equal.
What are Debits and Credits?
Every account recorded has its normal debit or credit balances.
Such an account corresponds to a counter account that makes the total debit and credit amounts equal.
Cash, an asset account has a normal debit balance.
To increase cash, it must be debited, and to decrease it, it must be credited.
Using the concept of double-entry bookkeeping, when cash is either debited or credited, there must also be a corresponding debit or credit.
For example, you made a sale and are paid through cash.
The recording of such sale and receipt of cash payment will be:
Debit: Cash (showing the increase in a cash account)
Credit: Revenue (showing an increase in Revenue due to the sale)
Introduction of Trial Balance
The accounts in the general ledger are required to be closed every year-end.
Since they are either on a debit or credit side, the trial balance summarizes the accounts by creating one column for all debit accounts, and one column for all credit accounts.
The purpose of the trial balance recording is to ensure that the total debited and credited accounts are equal.
When the Debit and Credit balances are unequal, an adjustment should be made using the suspense account.
There must be an error in recording that causes the two balances to be unequal. The accountant may search for the error by tracing back the records in the general ledger.
The preferable timing for the recording of the trial balance is monthly, quarterly, semi-annually, or annually so that it can easily be traced whenever an error has occurred.
It is the most used method of recording business transactions because it provides a more accurate amount of the transactions completed in the business.
The trial balance helps the organization to:
- Verify the amounts recorded in each transaction
- It can be an error detection tool
- The previous trial balance report can be used to compare the currently-made trial balance
- It helps in budgeting or forecasting financial-related data
- It is the initial step in the audit process, it is essential for error checking
- Trial balance is the first in the financial statement preparation
- A trial balance is said to be free from error if both debit and credit account is balanced
- Helps the management in the decision-making process
- It cannot particularly detect the error posted on either the debit or credit side
- It cannot detect double posting of entries
- It cannot determine If the recorded amount is in the right account
- It cannot report an omitted entry
What is the Balance Sheet?
The balance sheet provides relevant information regarding the financial health of the company.
It is composed of two columns that has be balanced, namely Assets and Liabilities.
For example, CSB Company needs $15,000 in additional funds for plant expansion.
To acquire such an amount, one needs to apply for a loan from a financial institution.
The proceeds from the loan are an addition to the cash account. A cash account is an asset item that has a normal debit balance.
Because it is a loan, it corresponds to an increase in liability which has a normal credit balance.
To avoid errors in recording the rules or concepts in double-entry bookkeeping must be fully understood.
The recording of the receipt of loan proceeds is shown as:
Credit: Loan from Bank
- The balance Sheet provides information on every acquired asset. However, if an asset is internally acquired, it is not recorded in the balance sheet as a quantifiable asset. Examples are the formation of a website, internal research, etc.
- Non-current assets such as machinery, equipment, real estate, etc. do not reflect the actual amount in the balance sheet even though they are subject to depreciation.
- The balance Sheet provides only a portion of the company’s financial health. When the company decides to settle its debt at a later date, it will not immediately impact the balance sheet report.
What are the Key Differences Between a Trial Balance and a Balance Sheet?
The main differences between a trial balance and a balance sheet are:
- The trial balance is used for internal purposes while the balance sheet is used for external transactions.
- Trial balance is categorized into debit and credit balances, while a balance sheet has three major accounts, asset liability, and owner’s equity. The standard equation of the balance sheet is A = L + E.
- All closed balances in the general ledger are reported in the trial balance. The trial balance is the first required document in preparing a balance sheet.
- The trial balance does not require the signature of an auditor. Before a balance sheet becomes a credible financial document, it needs to be signed first by the auditor.
- The timing of recording for the trial balance and balance sheet is monthly, quarterly, semi-annually, and annually, while for the balance sheet, it is only at the end of the accounting period.
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