Difference Between Trial Balance and Balance Sheet
May be due to the similarity in nomenclature a lot of people get confused between the Trial balance and the balance sheet, but by now you surely know that both these are completely different. The information from the trial balance is used to prepare the balance sheet. Two pieces of that foundation are the trial balance and the balance sheet.
- However, there still could be mistakes or errors in the accounting systems.
- The primary purpose of compiling a trial balance is to check the arithmetical accuracy of the accounts.
- The balance sheet provides relevant information regarding the financial health of the company.
- Balance sheet is the reporting of the financial condition of a company by way of a financial statement.
With the help of a balance sheet, it is easy for businessers to evaluate the business. The profit and loss records will deliver your company’s capable and non-capable information to generate earnings with cost reduction, revenue increment, or even both. These business financial statements are most frequently presented either in cash or on an accrual basis.
Such adjustments are relevant only for the particular accounting year. Trial balance also helps in the comparative analysis with a previous year’s balances and the current one. The main purpose is to detect if there are any numerical errors that might have occurred while the double-entry system of accounting. The term income statement is also known as the statement of operations or statement of income.
Hence, companies can prepare trial balance as per their requirement. In contrast, the company prepares a balance sheet at a particular date which is usually at the end of the accounting year. 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. Assets are financial resources owned by an organisation which can be converted into monetary value.
Similarly, the primary motive behind preparing a balance sheet is to establish the accuracy of the financial position of the company’s accounting records. It allows businesses a small business guide to cost centers to report their business financial performance for a certain period of accounting. The other two financial statements are the cash flow statement and the balance sheet.
- It may be issued only for internal use, or it may also be intended for such outsiders as lenders and investors.
- Trial Balance is a part of the accounting process, which is a summary of debit and credit balances taken from all the ledger accounts.
- The above-mentioned differences between Balance Sheet and Trial Balance are related to their purpose, format, content, stage in accounting, exceptions, etc.
- As against, the preparation of Trial Balance is not compulsory at all.
In order to understand the financial conditions the balance sheet and the cash flow statement also play an important role. The total expenses are subtracted from the total income in order to get the net income of the company which is displayed in the income statement. Trial balance is a mere compilation of all the closing general ledger balances, whereas the balance sheet reports the financial position on assets, liabilities and equity.
Trial Balance vs. Balance Sheet
Since the terms income statement and profit and loss statement describe a similar meaning, we use both the terms by interchanging throughout the article. In general, the profit and loss (P&L) statement is also known as an income statement. Some important distinctions here must be made between a trial balance vs balance sheet.
What is the Difference Between Balance Sheet and Trial Balance?
Existing assets are items that are already in the form of cash or will likely be converted to cash within a year. Non-current assets are items that are not likely to be converted to cash in the short term. Once the balance sheet accounts are tied out, the adjusted trial balance can create the income statement and balance sheet. The income statement tracks the results of operations over time, while the balance sheet tracks the cumulative impacts of operations on assets, liabilities, and stockholder’s equity. Besides correcting apparent errors, other adjustments may be needed as part of the accounting cycle to ensure that the numbers comply with accounting principles. As part of the closing process at the end of an accounting period, balance sheet accounts must be reconciled, and adjusting entries must be posted.
It also leads to the determination of the balances of all ledger accounts, which are eventually used for the financial statements. A trial balance is an internal document and is not presented to the external stakeholders. In contrast, the balance sheet is a part of the financial statements prepared both for internal and external stakeholders. So what other differences are there between these two types of documents, don’t miss out on the information that Viindoo will provide through the article below. A balance sheet will transfer your company liabilities, assets, and shareholder equity at a certain point in time.
The main purpose and objective of preparing the trial balance are to make sure that the individual company’s bookkeeping systems are accurate as per the mathematics. In this method, the process of totalling the ledger accounts on both sides is followed by balancing the accounts. Account balancing is a process where both sides are tallied by placing the balance on the side where the amount falls short. Trial balance is prepared to ensure the accuracy of the books of accounts.
Understand Your Numbers To Grow Your Business
The balance sheet, on the other hand, is part of the financial statement report created for end users like investors, creditors, and other related parties that have to do business with the firm. The sheet recording all of the balances of the general ledger accounts is known as the trial balance. Every company in Singapore maintains its financial statements in some way or the other. These refer to documents that help the onlookers to gauge the financial position of the company. While the outsiders only look into the figures, the insiders have to do a lot of work to ensure that the financial statements are presentable and in adherence to the requisite rules.
Companies can use a trial balance to keep track of their financial position, and so they may prepare several different types of trial balance throughout the financial year. A trial balance may contain all the major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses. 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. So, if you make a sale and collect the cash, you would account for it as follows. So the company’s cash account will be debited and the sales account will be credited to record the transaction. It is this double entry of debit and credit that is the basis of the double entry accounting system.
Balance sheet is prepared in ‘T’ format with liabilities recorded on the left and assets recorded on the right. 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.
This facilitates businesses in making informed decisions and adapting their strategies based on their financial standing. For further guidance on our Viindoo Accounting software, please contact us. As a small business, you’ll likely have several forms, sheets, reports, and statements concerning your finances. Two reports that you’ll likely be dealing with are trial balances and balance sheets. Both of these are essential to understanding your finances, but there are many business owners who don’t understand the differences. All three of these types have exactly the same format but slightly different uses.
Such uniformity guarantees that there are no unequal debits and credits that have been incorrectly entered during the double entry recording process. However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes. 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. Using accounting software makes it nearly impossible to record transactions out of balance, so the historical purpose of creating a trial balance – to verify that debits equal credits – is a trivial matter.
It is prepared again after the adjusting entries are posted to ensure that the total debits and credits are still balanced. It is usually used internally and is not distributed to people outside the company. Trial Balance is a type of accounting report which is used to check the accuracy of the various debit and credit transactions recorded in the ledgers. In simple words, it is a statement that shows the total of debits and credits from the various ledger accounts in one place. 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.