What Are Trial Balance and Balance Sheets?

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 -

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:

Differences Between Trial Balance and Balance Sheet

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

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.

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