The key difference between Trial Balance vs. a Balance sheet is that Trial Balance is the report of accounting in which ending balances of different General ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. of the company are presented in the debit column or the credit column. In contrast, the Balance sheet is one of the company’s financial statements that present the shareholders’ equity, liabilities, and the company’s assets at a particular point in time.
Differences Between Trial Balance and Balance Sheet
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.
In simple terms, a balance sheet is an extension of the accounts recorded in the trial 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.
To understand trial balance, we need to start from debit, credit, journal, and ledger. If these four concepts are digested, trial balance becomes easy.
And from the trial balance, we can make a balance sheet which we will create in this article.
Table of contents
- Differences Between Trial Balance and Balance Sheet
- Trial Balance vs. Balance Sheet Infographics
- What is Trial Balance?
- Debit & Credit
- Journal entry
- Ledger Entry
- Introduction of trial balance
- Example and format of Trial Balance
- What is the Balance Sheet?
- Key differences – Trial Balance vs. Balance Sheet
- Trial Balance vs. Balance Sheet (Comparison Table)
- Trial Balance vs. Balance Sheet Video
- Recommended Articles
Trial Balance vs. Balance Sheet Infographics
There are many differences between the trial balance vs. the balance sheet. Let’s have a look –
What is Trial Balance?
The trial balance is the total of all the end balances directly taken from the ledger accounts to see whether the total of debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. and the total of credit are equal. If debit balances don’t match with credit balances, then the accountant needs to investigate whether there’s an error in the recording or not.
If you understand debit, credit, journal, and ledger, the trial balance is as easy as possible.
Also, you may look at this in-depth article on How to Prepare a Trial Balance in accountingTrial Balance In AccountingTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.?
So, we will learn these four concepts first before going into the trial balance formatTrial Balance FormatTrial Balance has a tabular format that shows details of all ledger's balances in one place. As every organization must analyze its financial condition over a specific period of time, it contains transactions done during the year as well as the opening and closing balances of ledgers. with examples.
Debit & Credit
The simple rules of debit and credit are as follows. It would help if you remembered these rules to record all the transactions in the future.
- Debit the account when the assets/expenses increase and the liabilities/revenues decrease.
- Credit the account when the assets/expenses decrease and the liabilities/revenues increase.
We will take an example to illustrate this.
Let’s say Mr. M sells a product in cash.
Here, we have two accounts – “sales” and “cash.”
“Sales” is a revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples., and “cash” is an asset account.
By following the formula of debit and credit, we can approach this transaction.
First, Mr. M is selling the product; his revenue is increasing. That means the “sales” account is increasing. And as he is receiving cash instead of the product he is offering, the “Cash” account is also increasing.
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.
So, “cash” will be debited here, and “sales” will be credited.
Also, have a look at this detailed article on Debit vs. CreditDebit Vs. CreditA debit is a left-hand accounting entry that increases an asset or expense account while decreasing a liability or equity account. Credit, on the other hand, is a right-hand accounting entry that decreases an asset or expense account while increasing a liability or equity account..
If you understand debit and credit, a journal entry is easy. In the journal entry system, you need to record the debit and credit accounts properly.
Let’s take a simple example to illustrate this.
Example of Journal Entry
More capital is being invested in the company in the form of cash.
Here, cash is an “asset” account, and capital is a “liability” account, and both are increasing.
According to the rule of debit and credit, if a “liability” account increases, we will credit the account, and if an “asset” account decreases, we will debit the account.
The whole journal entry would be –
To Capital A/C……Credit
We will record the same example in the ledger entry system.
Ledger entry would be recorded in the “T” format.
Let’s see how it’s done.
The journal entry was –
Cash A/C……Debit…..$10,000 –
To Capital A/C……Credit… – $10,000
Debit Cash Account Credit
|To Capital Account||$10,000|
|By balance c/f||$10,000|
Debit Capital Account Credit
|By Cash Account||$10,000|
|To balance c/f||$10,000|
Introduction of trial balance
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.
And it will look like the following –
Trial Balance of MNC Co. for the year-end
|Particulars||Debit (Amount in $)||Credit (Amount in $)|
This is a temporary accountTemporary AccountTemporary accounts are nominal accounts that start with zero balance at the beginning of the financial year. The balance is visible in the income statement at the year-end and then transferred to the permanent as reserves and surplus. in the trial balance.
Creating this account balances the trial balance until the error is discovered temporarily.
When you see a suspense account in the trial balance, know that either the debit balance or the credit balance does not match another.
This suspense accountSuspense AccountSuspense Account is a general ledger account that holds records of temporary transactions that which do not have sufficient evidence for double entry or appropriate vouchers. This account is settled within the accounting period and does not appear anywhere in the financial statements. is created since a proper account can’t be identified until the error gets discovered.
Here’s an example of a suspense account –
Trial Balance of MNC Co. for the year-end
|Particulars||Debit (Amount in $)||Credit (Amount in $)|
*Note: Since the debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. is less than the credit balance, we created a suspense account to match up debit and credit balances until we find the error.
Example and format of Trial Balance
In this section, we will look at a complete trial balance, and then in the next section, “What is Balance Sheet?” we will make a balance sheet out of it.
Trial Balance of ABC Co. for the year-end
What is the Balance Sheet?
The balance sheet balances two sides – assets and liabilities.
For example, MNC Company took a loan from a bank of $20,000 in cash. The effect of this transaction would be on two sides –
- First, on the asset side, there would be the inclusion of “cash” of $20,000.
- And then, on the liability side, there will be a “debt” of $20,000.
You can see that the transaction has two-fold consequences which balance each other. First, under the balance sheet, these two accounts get balanced.
This is a very high level of understanding of the balance sheet.
Let’s understand each concept under the balance sheet.
Let’s look at assets first.
Under assets, first, we will consider “current assets.”
Current assets are assets that can easily be liquidated into cash. Here’re the items that we can consider under “current assets” –
- Cash & Cash Equivalents
- Short-term investments
- Trade & Other Receivables
- Prepayments & Accrued IncomeAccrued IncomeAccrued Income is that part of the income which is earned but hasn't been received yet. This income is shown in the balance sheet as accounts receivables.
- Derivative Assets
- Current Income Tax Assets
- Assets Held for Sale
- Foreign Currency
- Prepaid Expenses
Have a look at the example of current assets –
|L (in US $)||O (in US $)|
|Total Current Assets||9200||7900|
After current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc., we will look at “non-current assets,” also called “fixed assets.” These assets pay off for more than one year.
Under “non-current assets,” we would include the following items –
- Property, plant, and equipment
- Intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year.
- Investments in associates & joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.
- Financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.
- Employee benefits assets
- Deferred tax assets
If we add up “current assets” and “non-current assets,” we will get the “total assets.”
Under the liability section, we will first talk about “current liabilities.”
Current liabilities are liabilities that can be paid off within a year. We will consider the following items under current liabilities –
- Financial Debt (Short term)
- Trade & Other Payables
- Accruals & Deferred IncomeDeferred IncomeDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc.
- Current Income Tax Liabilities
- Derivative Liabilities
- Accounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.
- Sales Taxes PayableSales Taxes PayableSales taxes payable refers to the liability account created when an entity collects sales taxes on behalf of the government and stores the aggregate amount of taxes before paying the concerned taxes authority.
- Interests PayableInterests PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet.
- Short Term LoanShort Term LoanShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements.
- Current maturities of long term debt
- Customer deposits in advance
- Liabilities directly associated with assets held for sale
Let’s have a look at the format of current liabilities –
|L (in US $)||O (in US $)|
|Current Taxes Payable||1700||1400|
|Current Long-term Liabilities||2900||1000|
|Total Current Liabilities||8700||4900|
Now, we will talk about “non-current liabilities.”
Non-current liabilities include the following items –
- Financial Debt (Long term)
- Employee Benefits Liabilities
- Deferred Tax LiabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period.
- Other Payables
If we add up “current liabilities” and “non-current liabilities,” we will get “total liabilities.”
Now, if we remember the equation of the balance sheet, which is –
Assets = Liabilities + Shareholders’ Equity
We will now look at shareholders’ equity to complete the above equation.
Here’s the format of shareholders’ equity. If you can remember this format, forming the shareholders’ equity statement would be simpler –
|Additional Paid-up CapitalAdditional Paid-up CapitalAdditional paid-in capital or capital surplus is the company's excess amount received over and above the par value of shares from the investors during an IPO. It is the profit a company gets when it issues the stock for the first time in the open market.:|
|(-) Treasury Shares||(**)|
|(-) Translation Reserve||(**)|
If we add up “total liabilities” and “shareholders’ equity,” we will equate the total amount with the total amount of “total assets.”
Example of Balance Sheet
We will now look at the trial balance we saw in the previous section. From that trial balance, now we will form a balance sheet.
Balance Sheet of ABC Company
|2016 (In US $)|
|Plant & Machinery||45,000|
|Long term debt||50,000|
|Total Stockholders’ Equity||230,000|
|Total liabilities & Stockholders’ Equity||320,000|
Key differences – Trial Balance vs. Balance Sheet
There are many differences between the trial balance vs. the balance sheet. Here are they –
- Trial balance is an internal statement. A balance sheet is an external statement.
- The trial balance is divided among two types of accounts – debit and credit. Undertrial balance, the debit balance, and the credit balance should be equal. A balance sheet is divided into assets, liabilities, and shareholders’ equity. The balance sheet should always maintain the “assets = liabilities + shareholders’ equity.”
- Trial balance is done by taking the end balances from general ledgers. A balance sheet is done by using the trial balance as a source.
- A trial balance is created to ensure the accuracy of financial affairs. A balance sheet is created to show the right picture of financial affairs to the stakeholders.
- The trial balance doesn’t need any sign from the auditor. But a balance sheet must be signed by the auditor.
- Trial balance is recorded every month, quarter, half-yearly, and annually. On the other hand, the balance sheet is prepared at the end of every financial year.
Trial Balance vs. Balance Sheet (Comparison Table)
Here is a quick comparison chartComparison ChartA comparison chart represents various informational values linked to the same categories (for example, region-wise sales, city-wise sales), depicting a complete comparison between them and helps in decision-making process. highlighting the Trial Balance vs. Balance Sheet differences.
There are significant differences between the trial balance vs. the balance sheet. But trial balance and balance sheet are always connected. So even if the trial balance is prepared just for internal use and to see whether the transactions are accurately recorded, the balance sheet couldn’t be recorded properly without a trial balance.
Understanding the trial balance and balance sheet would be much easier if you understood debit, credit, journal, and ledger.
It’s all about understanding the fundamentals and applying them whenever required.
Trial Balance vs. Balance Sheet Video
This has been a guide to Trial Balance vs. Balance Sheet. Here we discuss the top difference between trial balance and balance sheet, infographics, and a comparison table. You may also have a look at the following articles –
- Accrual vs. DeferralAccrual Vs. DeferralAccrual is the process of recording revenue or expenses that have not yet been settled. Deferring means postponing the realization of revenue or expenditure until a later date.
- What is Deferred Tax Assets?
- Types of Balance Sheet RatiosTypes Of Balance Sheet RatiosBalance sheet ratio indicates relationship between two items of balance sheet or analysis of balance sheet items to interpret company’s results on quantitative basis . For example account receivable turnover, account payable turnover, inventory turnover ratio.
- General Ledger vs. Trial BalanceGeneral Ledger Vs. Trial BalanceA general ledger is a collection of master accounts in which the business's detailed transactions for all accounts are recorded. The trial balance, on the other hand, only reflects the company's ending balance in those accounts.