Difference between Trial Balance and Balance Sheet

By: Flaka Ismaili    September 23, 2020

The primary purpose of compiling a trial balance is to check the arithmetical accuracy of the accounts. In a double entry accounting system, each journal entry has an equal debit and credit impact. Thus a tallied trial balance i.e., where debit balances equal credit balances, serves as a check on this. A trial balance is defined as a ledger account that comprises of the ledger balance and the names of nominal ledger accounts.

Overall, the balance sheet is a financial statement that provides a list of balances. These balances give valuable insights into a company’s operations. More specifically, these help users understand the assets, liabilities and equity positions. This format comes from the accounting standards that companies follow.

  • He is the sole author of all the materials on AccountingCoach.com.
  • With accounting software, these clerical errors are unlikely.
  • 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.
  • Accrued IncomeAccrued Income is that part of the income which is earned but hasn’t been received yet.
  • The balance sheet and trial balance are two separate statements.

If the numbers do not balance each other, it indicates that the books of accounts have to be checked to see if there is an error in recording. As per the principles of double-entry bookkeeping, the debits and credits must balance each other. To properly understand the need for balancing figures in the trial balance, we must first understand the concept of debits and credits.

Investors and potential investors – to gauge the security and growth potential of their investment in the company. We will now look at shareholders’ equity to complete the above equation. First, on the asset side, there would be the inclusion of “cash” of $20,000.

On the other hand, the main objective of making a balance sheet is to know the actual financial condition of an organization. The articles and research support materials available on this site are educational and are not intended to be investment or tax difference between balance sheet and trial balance advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The profit and loss (P&L) statement will describe your business’s earned profit and lost money for the specified period.

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A balance sheet, like a trial balance, is a type of double-entry bookkeeping system, but it differs from a trial balance in almost every respect. On the other hand, a company can produce the balance sheet as proof in courts across the globe. This is because the balance sheet is in accordance with the GAAP, whereas the trial balance is not. Trial balance is a schedule showing equality of all debits and credits. But it is mandatory to create a balance sheet to know the financial condition of an organization.

difference between balance sheet and trial balance

Nominal account balances are accounted for through income statement. Balance sheet is prepared once trial balance is prepared and subsequent to prepare income statement . However, the trial balance does not act as an accumulator of general ledger balances. Furthermore, it also acts as an assurance for companies to ensure their bookkeeping is arithmetically correct. Like the balance sheet, companies must ascertain the trial balance balances.

Importance of Balance Sheet

It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. Prepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.

difference between balance sheet and trial balance

However, some errors are not revealed through trial balance they are compensating errors, error of omission, error of commission, error of principle and others. The trial balance can display real, personal, and nominal accounts. The sheet recording all of the balances of the general ledger accounts is known as the trial balance. However, some errors will not be reflected in the trial balance; therefore, even if the trial balances tallies, it cannot be guaranteed that the financial accounts are completely accurate. The following errors will not be reflected in the trial balance.

What is a Balance Sheet?

But if the total of both the columns is distinct then the chances of errors in the recording and posting are there. However, some errors are not revealed through trial balance they are compensating errors, an error of omission, an error of commission, an error of principle, and others. Moreover, it helps in error rectification by making the adjustments in particular accounting years. Comparative analysis is done by comparing the current year trial balance with the previous year trial balances. Conversely, the company will prepare the trial balance for only the purpose of internal use. Trial balance is only a list of accounts and is not considered as a financial statement for reporting purposes.

Trial balance is a statement showing debit and credit balances of all the ledger accounts as on a particular date; it contains balances of personal, real as well as nominal accounts. Instead, it is more concerned about the assets and liabilities https://1investing.in/ of an organization. It is prepared to understand the financial position of a company, including the assets it has and liabilities it needs to pay off. A trial balance is basically a list of ending balances of all ledger account balances.

While in the statement of financial position or balance sheet, only capital accounts are written. The trial balance is prepared after the ledger and before the financial statement is prepared. While Balance Sheet or statement of financial position is a statement prepared at the end of the accounting year to know the actual financial condition of the business on that day. Balances of all personal, real, and nominal accounts are shown in the trial balance.

Trial balance Vs. Balance sheet Vs. P&L Vs. Income statement

Balance sheet is prepared to show the financial position as on a particular date. The trial balance is the middle stage in the accounts preparation, while the balance sheet is the last stage. Balances of only real and personal accounts are to be shown in the balance sheet.

Balance sheet is a statement showing the position of assets and liabilities of the business. Read this article to learn about the difference between trial balance and balance sheet. Trial balance is prepared with the balance of all types of accounts. A Trial Balance is a list or statement prepared to check the mathematical accuracy of the account with the balances of the ledger of any particular day. The Trial Balance and the Balance Sheet or statement of financial position are the two most important stages in the accounting cycle. A closer examination of these two subjects shows significant differences.

And as he is receiving cash instead of the product he is offering, the “Cash” account is also increasing. It helps to ascertain credit worthiness of the company and its capacity to repay loans collected. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. All the team management, content creation, and monetization tasks are handled by me.

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. The figures in these columns are subsequently summed up for showing that the consolidated credit balance is equal to the consolidated debit balance. A trial balance is created to ensure the accuracy of financial affairs.