written by | May 18, 2022

What Are Trial Balance and Balance Sheets?

×

Table of Content


If you have a brief knowledge of accounting or finance, you would probably be aware of these terms. But a brief balance sheet and trial balance are a form of a statement in accounts that shows the situation of a business and the position of accounts at a given point in time. Though both of them sound similar, they are not. In the article, we will cover a trial balance and balance sheet. How to make them, and what are the differences between them?

Did you know?

Trial balance is often used as a base to create financial statements further. The trial balance also increases the accuracy of the accounts and adjusts them if required.

Also Read: What is the Difference Between Single Entry and Double Entry Bookkeeping?

The Differences Between Trial Balance and Trial Sheet

The trial balance is essentially an internal document. The balance sheet is generated to inform external stakeholders about the company's financial situation.

A balance sheet is essentially an extension of the accounts recorded in the trial balance. When you first start learning about balance sheets, you'll be given a trial balance and instructed to create a balance sheet format using the accounts listed in the trial balance.

What Is a Trial Balance?

A trial balance is a temporary list of balances taken from the general ledger accounts of a business. You can create the trial balance at any given time or show the balance of different accounts collectively on said date in the financial year. The accounts that a trial balance will show are the balances from accounts like – Assets, liabilities, revenue, gains or losses, etc. You can use a trial balance because it helps to pinpoint the amount of balance of debits and credit from the collective entries of a business in a financial year. If there are any left out entries or additional entries that you must adjust, they can also be adjusted during the formation of a trial balance.

What Is the Purpose or Use of Trial Balance?

Before preparing the final financial statements like the balance sheet (more on the balance sheet later in the article), you can schedule a trial balance to check if the prior ledger accounts are properly balanced. If they are not, the trial balance can help adjust the accounts so that the amount is balanced. This feature is often kept in the business as it is likely to be used in auditing. What does it mean by an amount not balancing or balancing? Understand that there are two sides to accounts: the debit and the credit side. Balancing of amounts would mean that the amount on the debit side matches the credit side. Often because of these features of a trial balance, it is also a useful tool that helps to create the main financial statements.

How to Prepare a Trial Balance?

Let us understand how we can prepare a trial balance for a business.

Example: A company, OLK ltd, was preparing their financial statements for the financial year ending in a month on 31st March 2022. One of the managers suggested that we should create a trial balance to check if they missed anything in any of the accounts, as they were expecting an audit soon. Given below is the information about the different ledgers –

Balance of cash a/c – ₹24,000 (debit)

Balance of Accounts receivables – ₹1,200 (debit)

Balance of suppliers – ₹2,600 (debit)

Balance of tools and other equipment - ₹3,000 (debit)

Unearned revenue – ₹4,400

Account payable – ₹900

Common stocks – ₹20,000

Dividends – ₹100 (debit)

Service revenue – ₹9,500

Salaries expense – ₹3,600 (debit)

Utility expenses – ₹300 (debit)

For this provided information, here is what a format of a trial balance will look like -

OLK ltd trial balance as on

1st March 2022

Accounts

Debit balance

Credit balance

Cash

₹24,000

 

Suppliers

₹2,600

 

Accounts receivables

₹1,200

 

Tools and other equipment

₹3,000

 

Unearned revenue

 

₹4,400

Account payable

 

₹900

Common stock

 

₹20,000

dividends

₹100

 

Service revenue

 

₹9,500

Salaries expense

₹3,600

 

Utilities expense

₹300

 

 

 

 

Total

₹34,800

₹34,800

This was a trial balance. Now let's see what a balance sheet is, and then we will go over the differences between a trial balance and a balance sheet, as both can be extremely similar.

What Is a Balance Sheet?

If you have ever worked in a company, you would know what financial statements are. Well, if you don't know, financial statements are the documents that show the performances of a company or we can say that it shows the financial position of a company. There are four financial statements widely used, and one of those financial statements is a balance sheet.

A balance sheet is simple to understand. For starters, think of it as the sheet that holds the collective amount of all assets and liabilities and their worth at a given date and shows them as per the financial years. That summarised information can be very helpful to stakeholders. Since if the stakeholders are properly informed, they can make better and more refined decisions.

Also Read: What is the Difference Between Gross Profit & Net Profit?

The Purpose of a Balance Sheet

A business can use a balance sheet for various purposes, including assessing a company's position in terms of business health. A balance sheet can give a clear picture of the value of the business at any given point in time. A balance sheet also works as a document through which you can compare different companies. Conducting financial assessments internally to track the performance of the business and help create standards or forecasts and various types of strategies if required. A balance sheet will also disclose the true capacity of a business. A balance sheet is one of the favourite documents that investors want to assess to analyse the company's worth.   

How to Prepare a Balance Sheet?

It is quite important to clearly understand what assets and liabilities a particular business has to create a balance sheet. After that are just a few steps using which a company can prepare a balance sheet for said date. To make it easy, you need to write all the assets and liabilities in a format collectively. Keep in mind that these are the total of all assets and all business liabilities. We can understand this with a simple example below:

Balance Sheet of OLK Ltd as of 31/03/22

 

 

ASSETS

 

CURRENT ASSETS

 

Cash

                                                                   ₹35,000

Accounts Receivable

                                                                         ₹100,000

Notes Receivable

                                                                           ₹18,000

Total Current Assets

                                                                 ₹1,53,000.

   

LONG-TERM ASSETS

 

Land

                                                                         ₹2,58,000

Office Equipment

                                                                           ₹64,500

Buildings

                                                                         ₹4,80,000

Motor Vehicles

                                                                         ₹1,01,500

Machinery

                                                                         ₹3,30,000

Total Long-Term Assets

                                                                      ₹12,34,000

TOTAL ASSETS

                                                            ₹13,87,000

   
   

LIABILITIES & OWNER'S EQUITY

 

CURRENT LIABILITIES

 

Accounts Payable

                                                                         ₹1,50,000

Accrued Payroll

                                                                  ₹24,500

Notes Payable

                                                                           ₹50,000 

Total Current Liabilities

                                                                         ₹2,24,500

   

LONG-TERM LIABILITIES

 

Mortgage Note Payable

                                                                         ₹2,30,000

Total Long-Term Liabilities

                                                                         ₹2,30,000

   

OWNER'S EQUITY

 

Stock & Paid-In Capital

                                                                         ₹5,27,500

Retained Earnings

                                                                         ₹40,5,000

Total Owner's Equity

                                                                         ₹9,32,500

   

TOTAL LIABILITIES & OWNER'S EQUITY

                                                                      ₹1,3,87,000

   

Differences Between Trial Balance and Balance Sheet

Let’s go over the differences between the balance sheet and trial balance chance.

Balance Sheet

Trial Balance

The balances in the balance sheets are shown as an aggregated amount of the respective accounts collectively.

The balances in the trial balance are at the account level.

There is a standard structure or format of a balance sheet since it is one of the financial statements.

There is no particular format to prepare a trial balance. A person can make the trial balance as they see fit as long as the basic functionality is not lost.

The balance sheets are used externally.

The trial balance is used internally by the business.

It has assets, liabilities and equity columns.

Debit and credit columns.

Generally prepared at the end of a financial year.

Typically, can be created at the end of a month, quarter, half-year or financial year.

A balance sheet is one of the final reports.

The trial balance is used to make final reports.

Conclusion

The trial balance and balance sheet are both a form of statements. The balance sheet is generally for the people outside of the company as it fulfils the external purposes. At the same time, the trial balance provides a good insight into the accounts of internal departments of the company. Though trial balance and balance sheet seem similar, they are far from the same. We have covered some of the differences among them in this article above. We have also covered the format of a balance sheet. A trial balance doesn't have a stand balance, and it is up to the company how they would prefer to make a trial balance.

Now keep track of your cashflow and manage your incomes and expenses with ease by using the Cashbook app by Khatabook.

FAQs

Q: Are trial balance and balance sheet the same?

Ans:

The clear answer to the question is no. They are not the same though it does solve similar kinds of purposes. But as the trial balance is collective information of all the accounts, and it can be in detail. The balance sheet is a summarised and aggregated version of all total assets and total liabilities of the business.

Q: Why should we use a trial balance?

Ans:

Any business often uses the trial balance to check the accounts before making the final reports. So that if there is a need to adjust something, it can be done.

Q: What is the final report or financial statement?

Ans:

A financial statement is a statement that helps understand a business's position in a true and summarised sense. The balance sheet is one of the financial statements, but the trial balance is not.

Q: What kind of accounts do trial balance and balance sheets consider?

Ans:

Both show real and personal accounts, and the balance sheet, however, also indicates nominal accounts.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
×

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.