Trial Balance vs Balance Sheet: A Comparative Analysis

It also leads to the determination of the balances of all ledger accounts, which are eventually used for the financial statements. The balance sheet will express the company’s assets, equity, and liabilities. If you take the credit and debit balance statement from the source of the general ledger, it is a trial balance. From the balance sheet statement, you receive the company’s assets, equity, and liabilities summary. The profit and loss account will give an overview of the revenue and expenses of a company. Understanding how information flows through your accounting system can help you see where the numbers in your financial statements come from.

The balance sheet summarizes the recorded amount of assets, liabilities, and shareholders’ equity in a company’s accounting records as of a specific point in time (usually as of the end of a month). It is constructed based on the accounting standards described in one of the accounting frameworks, such as Generally Accepted Accounting Principles or International Financial Reporting Standards. A financial statement showing the company’s income and expenditures is known as the income statement. With the help of income statements, one can understand the financial health of his business.

Difference between P&L statement Vs income statement

Trial balances are recorded for every month or quarter so that any errors in the accounting records can be identified and corrected as soon as possible. It is an excellent way of internally keeping an eye on the accurate recording of all accounting transactions. It is the most straightforward method of detecting any wrong or improper entries made in the books of accounts.

The accounts reflected on a trial balance are related to all major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to identify the balance of debits and credits entries from the transactions recorded in the general ledger at a certain point in time. A trial balance can be defined as a statement of debit as well as credit balances whereas a balance sheet can be defined as a statement of assets, liabilities, and stockholders’ equity. Trial balance ignores opening stock and includes closing stock whereas balance sheet includes opening stock but excludes closing stock. Trial balances are neither a part of final accounts nor a part of financial statements whereas a balance sheet is a part of both financial statements and final accounts.

  • The main difference from the general ledger is that the general ledger shows all of the transactions by account, whereas the trial balance only shows the account totals, not each separate transaction.
  • The intention to create trial balance is to facilitate easier preparation of the financial statements.
  • A balance sheet offers a glimpse of what an entity actually owns and owes along with the capital that is invested in the company by the equity holders.
  • The accounts in the general ledger are required to be closed every year-end.
  • This Balance is usually prepared at the end of an Accounting Period to help in the preparation of financial statements.

The balance sheet, however, is a document that is prepared for each financial year. The key differences between trial balance vs balance sheet can be summarized in the following table. The primary purpose of compiling a trial balance is to check the arithmetical accuracy of the accounts. In a double entry accounting system, each journal entry has an equal debit and credit impact. Thus a tallied trial balance i.e., where debit balances equal credit balances, serves as a check on this. Companies initially record their business transactions in bookkeeping accounts within the general ledger.

Prepared from

In a balance sheet, the assets and the liabilities are divided into two separate categories which include current assets or current liabilities and noncurrent (long term assets) or noncurrent liabilities. After the illiquid accounts or non-current accounts such as plant, property, and equipment (PP & E) and the long-term debt, more liquid accounts are placed such as cash, inventory, and the trade payables. The balance sheet is a package of assets and liabilities statements, but the profit and loss account (P&L) is an account. Trial Balance is a worksheet which records all the transactions from ledgers into credit and debit sections, the purpose of preparing a trial balance is to maintain accuracy in records. Assets are financial resources owned by an organisation which can be converted into monetary value.

Is a trial balance the same as a balance sheet and income statement?

The purpose of a trial balance is to check the equality of debits and credits in the ledger. If the trial balance does not equalize, then there is an error somewhere in the ledger account balances. A trial balance is an internal report that lists all financial accounts and their ending balances on a specific date. These balances arise from double-entry accounting, which means that debits should equal credits.

Table 1: Trial balance and balance sheet difference

The main purpose is to detect if there are any numerical errors that might have occurred while the double-entry system of accounting. Meet Assam, a final-year chartered accountant student who’s always hungry for knowledge. Self-motivated and driven by curiosity, Assam has a passion for learning about accounting, economics, and the fascinating world of cryptocurrency. Whether it’s mastering complex financial concepts or staying up-to-date on the latest market trends, Assam is always up for a challenge. Firms will prepare the balance sheet based on the transferred balance from the P&L account.

Ask Any Financial Question

A trial balance is prepared to identify any numerical errors that may have taken place in the double-entry accounting system. Trial balance is primarily used for internal use of accountants and auditors to check arithmetical accuracy of books. Balance sheet on the other hand plays a more pivotal role in the accounting cycle as it is reported externally and relied upon by several stakeholders. Accountants and auditors thus focus on ensuring that the balance sheet presentation is accurate. This article looks at meaning of and differences between two steps of this accounting cycle – trial balance and balance sheet.

Importance of Balance Sheet

Debits are the side of an account which shows the increase in assets, decrease in liabilities and capital. Credits means opposite i.E., Decrease in assets, increase in liabilities or capital accounts. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

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