Trial Balance vs Balance Sheet

Trial Balance vs. Balance Sheet -The trial balance is an internal document. And the balance sheet is prepared to disclose the company's financial affairs to external stakeholders.

In simple terms, a balance sheet is an extension of the accounts recorded in the trial balance. When you begin learning a balance sheet, you will be given a trial balance and asked to prepare a balance sheet format using the accounts mentioned in the trial balance.

To understand trial balance, we need to start from debit, credit, journal, and ledger. If these four concepts are digested, trial balance becomes easy.

And from the trial balance, we can make a balance sheet which we will create in this article.

There are many differences between the trial balance vs. the balance sheet. Let's have a look –

The trial balance is the total of all the end balances directly taken from the ledger accounts to see whether the total of debit and the total of credit are equal. If debit balances don't match with credit balances, then the accountant needs to investigate whether there's an error in the recording or not.

If you understand debit, credit, journal, and ledger, the trial balance is as easy as possible.

Also, you may look at this in-depth article on How to Prepare a Trial Balance in accounting?

So, we will learn these four concepts first before going into the trial balance format with examples.

The simple rules of debit and credit are as follows. It would help if you remembered these rules to record all the transactions in the future.

• Debit the account when the assets/expenses increase and the liabilities/revenues decrease.
• Credit the account when the assets/expenses decrease and the liabilities/revenues increase.

We will take an example to illustrate this.

Let's say Mr. M sells a product in cash.

Here, we have two accounts – "sales" and "cash."

“Sales” is a revenue account, and "cash" is an asset account.

By following the formula of debit and credit, we can approach this transaction.

First, Mr. M is selling the product; his revenue is increasing. That means the "sales" account is increasing. And as he is receiving cash instead of the product he is offering, the "Cash" account is also increasing.

According to the rule of debit and credit, we will debit the account when the asset increases, and we will credit the account when revenue is increasing.

So, "cash" will be debited here, and "sales" will be credited.

Also, have a look at this detailed article on Debit vs. Credit.

If you understand debit and credit, a journal entry is easy. In the journal entry system, you need to record the debit and credit accounts properly.

Let's take a simple example to illustrate this.

Example of Journal Entry

More capital is being invested in the company in the form of cash.

Here, cash is an "asset" account, and capital is a "liability" account, and both are increasing.

According to the rule of debit and credit, if a "liability" account increases, we will credit the account, and if an "asset" account decreases, we will debit the account.

The whole journal entry would be –

Cash A/C……Debit

To Capital A/C……Credit

We will record the same example in the ledger entry system.

Ledger entry would be recorded in the "T" format.

Let's see how it's done.

The journal entry was –

Cash A/C……Debit…..$10,000 -

To Capital A/C……Credit… -     $10,000

Debit                                                     Cash Account                                                    Credit

Debit                                                  Capital Account                                                    Credit

In the previous example, we found out the end balance of the cash account and capital account. Therefore, these end balances will appear in the trial balance.

And it will look like the following –

Trial Balance of MNC Co. for the year-end

Suspense account

This is a temporary account in the trial balance.

Creating this account balances the trial balance until the error is discovered temporarily.

When you see a suspense account in the trial balance, know that either the debit balance or the credit balance does not match another.

This suspense account is created since a proper account can't be identified until the error gets discovered.

Here's an example of a suspense account –

Trial Balance of MNC Co. for the year-end

*Note: Since the debit balance is less than the credit balance, we created a suspense account to match up debit and credit balances until we find the error.

In this section, we will look at a complete trial balance, and then in the next section, "What is Balance Sheet?" we will make a balance sheet out of it.

Trial Balance of ABC Co. for the year-end

The balance sheet balances two sides – assets and liabilities.

For example, MNC Company took a loan from a bank of $20,000 in cash. The effect of this transaction would be on two sides –

• First, on the asset side, there would be the inclusion of "cash" of $20,000.
• And then, on the liability side, there will be a "debt" of $20,000.

You can see that the transaction has two-fold consequences which balance each other. First, under the balance sheet, these two accounts get balanced.

This is a very high level of understanding of the balance sheet.

Let's understand each concept under the balance sheet.

Assets

Let's look at assets first.

Under assets, first, we will consider "current assets."

Current assets are assets that can easily be liquidated into cash. Here're the items that we can consider under "current assets" –

• Cash & Cash Equivalents
• Short-term investments
• Inventories
• Trade & Other Receivables
• Prepayments & Accrued Income
• Derivative Assets
• Current Income Tax Assets
• Assets Held for Sale
• Foreign Currency
• Prepaid Expenses

Have a look at the example of current assets –

After current assets, we will look at "non-current assets," also called "fixed assets." These assets pay off for more than one year.

Under "non-current assets," we would include the following items –

• Property, plant, and equipment
• Goodwill
• Intangible assets
• Investments in associates & joint ventures
• Financial assets
• Employee benefits assets
• Deferred tax assets

If we add up "current assets" and "non-current assets," we will get the "total assets."

Liabilities

Under the liability section, we will first talk about "current liabilities."

Current liabilities are liabilities that can be paid off within a year. We will consider the following items under current liabilities –

• Financial Debt (Short term)
• Trade & Other Payables
• Provisions
• Accruals & Deferred Income
• Current Income Tax Liabilities
• Derivative Liabilities
• Accounts Payable
• Sales Taxes Payable
• Interests Payable
• Short Term Loan
• Current maturities of long term debt
• Customer deposits in advance
• Liabilities directly associated with assets held for sale

Let's have a look at the format of current liabilities –

Now, we will talk about "non-current liabilities."

Non-current liabilities include the following items –

• Financial Debt (Long term)
• Provisions
• Employee Benefits Liabilities
• Deferred Tax Liabilities
• Other Payables

If we add up "current liabilities" and "non-current liabilities," we will get "total liabilities."

Now, if we remember the equation of the balance sheet, which is –

Assets = Liabilities + Shareholders’ Equity

We will now look at shareholders’ equity to complete the above equation.

Shareholders’ Equity

Here's the format of shareholders' equity. If you can remember this format, forming the shareholders' equity statement would be simpler –

If we add up "total liabilities" and "shareholders' equity," we will equate the total amount with the total amount of "total assets."

Example of Balance Sheet

We will now look at the trial balance we saw in the previous section. From that trial balance, now we will form a balance sheet.

Balance Sheet of ABC Company

There are many differences between the trial balance vs. the balance sheet. Here are they –

• Trial balance is an internal statement. A balance sheet is an external statement.
• The trial balance is divided among two types of accounts – debit and credit. Undertrial balance, the debit balance, and the credit balance should be equal. A balance sheet is divided into assets, liabilities, and shareholders' equity. The balance sheet should always maintain the "assets = liabilities + shareholders' equity."
• Trial balance is done by taking the end balances from general ledgers. A balance sheet is done by using the trial balance as a source.
• A trial balance is created to ensure the accuracy of financial affairs. A balance sheet is created to show the right picture of financial affairs to the stakeholders.
• The trial balance doesn't need any sign from the auditor. But a balance sheet must be signed by the auditor.
• Trial balance is recorded every month, quarter, half-yearly, and annually. On the other hand, the balance sheet is prepared at the end of every financial year.

Here is a quick comparison chart highlighting the Trial Balance vs. Balance Sheet differences.

There are significant differences between the trial balance vs. the balance sheet. But trial balance and balance sheet are always connected. So even if the trial balance is prepared just for internal use and to see whether the transactions are accurately recorded, the balance sheet couldn't be recorded properly without a trial balance.

Understanding the trial balance and balance sheet would be much easier if you understood debit, credit, journal, and ledger.

It's all about understanding the fundamentals and applying them whenever required.

This has been a guide to Trial Balance vs. Balance Sheet. Here we discuss the top difference between trial balance and balance sheet, infographics, and a comparison table. You may also have a look at the following articles –

• Accrual vs. Deferral
• What is Deferred Tax Assets?
• Types of Balance Sheet Ratios
• General Ledger vs. Trial Balance