Difference Between Balance Sheet and Trial Balance

Difference Between Balance Sheet and Trial Balance

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Rashmi
Rashmi Karan
Manager - Content
Updated on Dec 27, 2023 16:54 IST

Companies prepare financial statements at the end of the Fiscal year or a defined accounting period to understand improvement in revenues and profits and management of the company’s assets, liabilities, capital, income and expenses. To do this, the company prepares a series of financial statements that include a balance sheet and a trial balance. Both balance sheets and trial balances are created as per the defined accounting rules and regulations and serve different purposes. Learn about balance sheets and trial balances, and also explore the difference between balance sheet and trial balance.

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Comparison Table – Balance Sheet vs Trial Balance

The trial balance details all the accounts that were affected during an accounting cycle, showing their balances from the records made in the general ledger, while a balance sheet shows the economic situation of the entity, detailing the final balances of the three main groups: assets, liabilities and the company’s equity. Let us understand this in detail.

Balance Sheet Trial Balance
An external document to be used by investors, suppliers, customers, employees and the general public to understand a company’s financial position. An internal document to verify the accuracy of the recorded accounting data.
Contains information on assets, liabilities and capital accounts. Contains the balances of all company accounts.
Divided into assets, equity and liabilities Divided into Debit and Credit Columns
Displays personal and real accounts. Displays personal, real and nominal accounts.
Prepared at the end of the fiscal year. Prepared at the end of each month, quarter, semester or financial year.
Balance sheet is part of the financial statement. Trial balance is not a part of the financial statement.

What is a Balance Sheet?

A balance sheet is a statement of a company’s financial position at a specific time, such as the end of the month, quarter, or year. The balance sheet shows assets and lists liabilities, creating a statement of what the business owns and owes.

Assets are listed first in order of liquidity, including cash, short-term investments, accounts receivable, notes receivable, inventory, and prepaid expenses. 

Long-term assets include investments, fixed assets such as real estate, other assets, and intangible assets. 

The sum of all assets should equal the next section of the balance sheet, which lists all liabilities in order of maturity and stockholders’ equity. 

The format for the balance sheet can vary in elements and organization since not all companies present the same financial situation. The general balance sheet is personalized and adapted to the financial statements of each business. However, some general recommendations can help you keep it healthy and in order.

Regardless of the format you decide to use to do your accounting, the balance sheet is made up of three sections:

Assets 

  • Current assets
  • Cash and cash equivalents
  • Investments
  • Inventories
  • Accounts receivable
  • Commodity
  • Deferred taxes
  • Equipment
  • Properties
  • Advance payments for merchandise
  • Insurance

Liabilities 

  • Accounts payable
  • Bills
  • Payroll and payment to external workers (freelancers)
  • Taxes
  • Interest and loans payable
  • Rents
  • General debt and other obligations

The third section refers to net worth, that is, it includes all the social capital, as well as shares.

What is a Trial Balance?

The trial balance is an accounting instrument used to establish a summary of the financial status and operations carried out in the company during a given period. A trial balance reflects the sum of the debits and credits of the different accounts and their corresponding balance. This accounting instrument confirms that all the balances are reliable.

Functions of a Trial Balance

A trial balance aims to – 

  • Classify the items that will form part of the financial statements.
  • Determine the balances that will form part of the financial statements.
  • Establish the movements of the period.
  • Observe compliance with recognition principles for initial and subsequent measurement and derecognition.
  • Analyze the balances of the account items.
  • Determine the criteria of materiality and relative importance.
  • Identify errors in account balances.
  • Check double entry.
  • Identify whether accounting estimates have been made.

What to do if the Trial Balance Does Not Balance?

If a trial balance does not add up, there is probably an error in some journal entry or an error in making the balance. In this case, the most useful thing is to review the journal entries. In the absence of these, the balance must be redone. But it will always be possible to locate those errors, for example:

  • Due to the omission or repetition of any figure or account.
  • Due to the entry of a debit item in credit or vice versa.
  • For the investment or dance of numbers that make up the account.
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Conclusion

Balance sheet and trial balance are very different from each other. Preparing the trial balance is not mandatory at all, but preparing the balance sheet is mandatory for all companies. The trial balance is not read by users of the financial statement or by interested parties, but they use the balance sheet.

The trial balance can be prepared as per the requirements of the organization, whereas the balance sheet is prepared on a particular date, which is usually at the end of the accounting year.


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FAQs - Difference Between Balance Sheet and Trial Balance

Is a Balance Sheet considered a financial statement?

Yes, a Balance Sheet is one of the three primary financial statements, along with the Income Statement and Cash Flow Statement, used to report a company's financial performance and position.

Can a Trial Balance help identify the specific errors in the accounting records?

Yes, a Trial Balance can help identify errors, but it does not pinpoint the exact nature of errors. It indicates that errors exist when the debits and credits don't balance.

Are adjustments and closing entries reflected in a Trial Balance?

Adjustments and closing entries made at the end of an accounting period are not reflected in the Trial Balance. It includes only the account balances at the time it is prepared.

What is the order of preparation between a Trial Balance and a Balance Sheet?

A Trial Balance is typically prepared first to ensure the books are in balance, and once it confirms accuracy, a Balance Sheet is prepared to report the financial position.

Can a company have a Trial Balance in balance but still have accounting errors?

Yes, a Trial Balance can be in balance even with accounting errors if the errors offset each other, such as equal and opposite mispostings.

Who primarily uses a Trial Balance, and who relies on a Balance Sheet?

Accountants and financial professionals primarily use a Trial Balance for internal verification, while stakeholders, investors, and creditors rely on a Balance Sheet for financial decision-making and analysis.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio