Trial Balance vs Balance Sheet

The key difference between Trial Balance vs Balance sheet is that Trial Balance is the report of accounting in which ending balances of different General ledgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance.read more of the company are presented into the debit column or the credit column, whereas, Balance sheet is one of the financial statements of the company which presents the shareholders’ equity, liabilities and the assets of the company at a particular point of time.

Differences Between Trial Balance and Balance Sheet

Trial Balance vs. Balance Sheet -Basically, the trial balance is an internal document. And the balance sheet is prepared to disclose the financial affairs of the company to external stakeholders.

In simple terms, a balance sheet is an extension of the accounts recorded in the trial balance. When you’re beginning to learn a balance sheet, you will be given a trial balance and would be asked to prepare a format of a balance sheet using the accounts mentioned in the trial balance.

If you want to understand trial balance, we need to start from debit, credit, journal, and ledger. If these four concepts are digested, trial balance becomes easy.

Trial Balance vs Balance Sheet

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And from the trial balance, we can make a balance sheet which we will create in this article.

Trial Balance vs. Balance Sheet Infographics

There are many differences between the trial balance vs. balance sheet. Let’s have a look –

Trial Balance vs Balance Sheet

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What is Trial Balance?

The trial balance is the sum-total of all the end balances that are directly taken from the ledger accounts to see whether the total of debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more and the total of credit are equal or not. If debit balances don’t match with credit balances, then the accountant needs to investigate whether there’s an error in recording or not.

If you understand debit, credit, journal, and ledger, the trial balance is as easy as you can imagine.

Also, you may have a look at this in-depth article on How to Prepare a Trial Balance in accounting?

So, we will learn these four concepts first before going into the format of the trial balanceFormat Of The Trial BalanceTrial 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.read more with examples.

Debit & Credit

The simple rules of debit and credit are as follows. You need to remember 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.read more, 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 means; his revenue is increasing. That means the “sales” account is increasing. And as he is receiving cash in lieu 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 is increasing, and we will credit the account when revenue is increasing.

So, here “cash” will be debited, and “sales” would 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.read more.

Journal entry

If you understood debit and credit, a journal entry is easy. In the journal entry system, you just need to record the debit and credit accounts in proper order.

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 –

Cash A/C……Debit

To Capital A/C……Credit

Ledger Entry

We will take the same example and record 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 cash account and capital account. These end balances will appear in trail balance.

And it will look like the following –

Trial Balance of MNC Co. for the year-end

ParticularsDebit (Amount in $)Credit (Amount in $)
Cash Account10,000
Capital Account10,000
Total10,00010,000

Suspense account

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.read more in the trial balance.

The purpose of creating this account is to temporarily balance the trial balance until the error is discovered.

When you would see a suspense account in the trial balance, know that either the debit balance or the credit balance is not matching with 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.read more is created since a proper account can’t be identified until the error gets discovered.

Here’s an example of suspense account –

Trial Balance of MNC Co. for the year-end

ParticularsDebit (Amount in $)Credit (Amount in $)
Cash Account10,000
Sales Account60,000
Debtor Account40,000
Creditor Account25,000
Salaries Account15,000
Advertisement Account10,000
Capital Account10,000
Suspense Account*20,000
Total95,00095,000

*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.read more is lesser than the credit balance, we created a suspense account to match up debit and credit balances until we can 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

ParticularsDebit (Amount in $)Credit (Amount in $)
Cash Account45,000
Bank Account35,000
Investments Account100,000
Equipment Account30,000
Outstanding expenses15,000
Prepaid Expenses     25,000
Debtor Account40,000
Creditor Account25,000
Shareholders’ Equity210,000
Long term debt AccountTerm Debt AccountLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more50,000
Plant & Machinery Account45,000
Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more20,000
Total320,000320,000

What is the Balance Sheet?

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 “debt” of $20,000.

You can see that the transaction has two-fold consequences which balance each other. 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.

Assets

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” –

Have a look at the example of current assets

 L (in US $)O (in US $)
Cash 35002600
Cash Equivalent19001900
Accounts Receivable24002200
Inventories14001200
Total Current Assets92007900

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.read more, we will look at “non-current assets,” which are also called “fixed assets.” These assets pay off for more than one year.

Under “non-current assets,” we would include the following items –

If we add up “current assets” and “non-current assets,” we will get the “total assets.”

Liabilities

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 –

Let’s have a look at the format of current liabilities –

 L (in US $)O (in US $)
Accounts Payable41002500
Current Taxes Payable17001400
Current Long-term Liabilities29001000
Total Current Liabilities87004900

Now, we will talk about “non-current liabilities.”

Non-current liabilities include the following items –

If we add up “current liabilities” and “non-current liabilities,” we will get “total liabilities.”

Now, if we remember the equation of balance sheet which is –

Assets = Liabilities + Shareholders’ Equity

We will now look at shareholders’ equity to complete the above equation.

Shareholders’ Equity

Here’s the format of shareholders’ equity. If you can remember this format, forming the shareholders’ equity statement would be simpler –

Shareholders’ Equity 
Paid-in Capital: 
Common Stock***
Preferred Stock***
Additional Paid-up Capital: 
Common Stock**
Preferred Stock**
Retained Earnings***
(-) 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 go back and 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 $)
Assets 
Cash45,000
Bank35,000
Prepaid Expenses25,000
Debtor40,000
Investments100,000
Equipment30,000
Plant & Machinery45,000
Total Assets320,000
Liabilities 
Outstanding expenses15,000
Creditor25,000
Long term debt50,000
Total Liabilities90,000
Stockholders’ Equity 
Shareholders’ equity210,000
Retained Earnings20,000
Total Stockholders’ Equity230,000
Total liabilities & Stockholders’ Equity320,000

Key differences – Trial Balance vs. Balance Sheet

There are many differences between the trial balance vs. balance sheet. Here are they –

  • Trial balance is an internal statement. A balance sheet is an external statement.
  • 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 three sections – assets, liabilities, and shareholders’ equity. The balance sheet should always maintain the equation – “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 forth 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. The balance sheet, on the other hand, is prepared at the end of every financial year.

Trial Balance vs. Balance Sheet (Comparison Table)

Here is a quick comparison chart highlighting the differences between the Trial Balance vs. Balance Sheet.

The basis for Comparison – Trial Balance vs. Balance SheetTrial BalanceBalance Sheet
1.    Inherent meaningTrial balance is created to record all the balances of ledger accountsLedger AccountsLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read more.A balance sheet is created to see whether the assets equal liabilities plus equity.
2.    Application Trial balance is used to see whether the total of debit balances equal credit balances.The balance sheet is used to show the accuracy of the financial affairs of a company.
3.    Is it a financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more?No.Yes.
4.    Division – Trial Balance vs. Balance SheetEvery account is divided between debit and credit balances.Every account is divided into assets, liabilities, and shareholders’ equity.
5.    Used forInternal purpose.External purpose.
6.    Recorded when?Trial balance is recorded at the end of each month, quarter, half-year, and year.The balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more is only recorded at the end of any financial year.
7.    SourceGeneral ledger.Trial Balance.
8.    SignatureThe auditor doesn’t need to sign it.The auditor needs to sign it.
9.    Rule of thumb – Trial Balance vs. Balance SheetThere’s no rule of thumb in arranging ledger balancesLedger BalancesA ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.read more.Assets, liabilities, and shareholders’ equity should be arranged in proper order.
10.  Part of the final accountsTrial balance is not part of the final accounts.The balance sheet is part of the final accounts.

Conclusion

There are significant differences between the trial balance vs. balance sheet. But trial balance and balance sheet are always connected to each other. Even if the trial balance is prepared just for internal use and to see whether the transactions are accurately recorded or not, without trial balance, balance sheet couldn’t be recorded properly.

If you understand debit, credit, journal, and ledger, then understanding the trial balance and balance sheet would be much easier.

It’s all about understanding the fundamentals and applying them whenever they’re required.

Trial Balance vs. Balance Sheet Video

 

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