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 ledger 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

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

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 debit 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 balance 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 account, 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. Credit.

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

Particulars Debit (Amount in $) Credit (Amount in $)
Cash Account 10,000
Capital Account 10,000
Total 10,000 10,000

Suspense account

This is a temporary account 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 account 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

Particulars Debit (Amount in $) Credit (Amount in $)
Cash Account 10,000
Sales Account 60,000
Debtor Account 40,000
Creditor Account 25,000
Salaries Account 15,000
Advertisement Account 10,000
Capital Account 10,000
Suspense Account* 20,000
Total 95,000 95,000

*Note: Since the debit balance 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

Particulars Debit (Amount in $) Credit (Amount in $)
Cash Account 45,000
Bank Account 35,000
Investments Account 100,000
Equipment Account 30,000
Outstanding expenses 15,000
Prepaid Expenses      25,000
Debtor Account 40,000
Creditor Account 25,000
Shareholders’ Equity 210,000
Long term debt Account 50,000
Plant & Machinery Account 45,000
Retained Earnings 20,000
Total 320,000 320,000

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” –

  • Cash & Cash Equivalents
  • Short-term investments
  • Inventories
  • Trade & Other Receivables
  • Prepayments & Accrued Income
  • 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 $)
Cash 3500 2600
Cash Equivalent 1900 1900
Accounts Receivable 2400 2200
Inventories 1400 1200
Total Current Assets 9200 7900

After current assets, 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 Payable 4100 2500
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 –

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  
Cash 45,000
Bank 35,000
Prepaid Expenses 25,000
Debtor 40,000
Investments 100,000
Equipment 30,000
Plant & Machinery 45,000
Total Assets 320,000
Liabilities  
Outstanding expenses 15,000
Creditor 25,000
Long term debt 50,000
Total Liabilities 90,000

 

Stockholders’ Equity
Shareholders’ equity 210,000
Retained Earnings 20,000
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. 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 Sheet Trial Balance Balance Sheet
1.    Inherent meaning Trial balance is created to record all the balances of ledger accounts. 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 statement? No. Yes.
4.    Division – Trial Balance vs. Balance Sheet Every account is divided between debit and credit balances. Every account is divided into assets, liabilities, and shareholders’ equity.
5.    Used for Internal purpose. External purpose.
6.    Recorded when? Trial balance is recorded at the end of each month, quarter, half-year, and year. The balance sheet is only recorded at the end of any financial year.
7.    Source General ledger. Trial Balance.
8.    Signature The auditor doesn’t need to sign it. The auditor needs to sign it.
9.    Rule of thumb – Trial Balance vs. Balance Sheet There’s no rule of thumb in arranging ledger balances. Assets, liabilities, and shareholders’ equity should be arranged in proper order.
10.  Part of the final accounts Trial 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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