Concept of Trial Balance
Trial balance is an internal report generated by a company’s accounting department that lists general ledger accounts as well as its balances. The columns in the trial balance show the credit balance and debit balance amounts.
The figures in these columns are subsequently summed up for showing that the consolidated credit balance is equal to the consolidated debit balance.
Importance of Trial Balance
Trial balance acts as the precursor to the preparation of financial statements as well as assessing the arithmetical accuracy. It is used for the verification of actual amounts from various ledgers. It also leads to the determination of the balances of all ledger accounts, which are eventually used for the financial statements.
It assists in the rectification of errors and makes due adjustments. 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.
Concept of Balance Sheet
As an external reporting document, the balance sheet forms a part of the financial statement of a company. It is primarily a summary and report on the balances generated out of liabilities, assets and the equity accounts held by stockholders in the general ledger of a company.
Due to this fact, a balance sheet is also referred to as "Statement of financial position". This financial statement pertains to a particular date which is usually the accounting period’s last date.
Importance of Balance Sheet
The importance of balance as a part of a company’s financial statement can be understood along with the documents of cash flow and income statements. All of these combined together help in indicating the financial position of the company to the interested parties. It imparts the information about what the company owes and owns.
Such information is particularly crucial for such investors who seek to derive insights on the operations and financial health of a company for considering whether it will be a sound investment option.
Trial Balance vs Balance Sheet
The table below shows how to distinguish between trial balance and balance sheet.
Trial balance is the compilation of the balances in all ledger accounts
Balance sheet is the reporting of the financial condition of a company by way of a financial statement.
After all the ledger accounts have been balanced and totalled, trial balance can be prepared
After the compilation of trial balance and the profit and loss account is drawn up, balance sheet can be prepared
There is a columnar format in trial balance with the right column indicating credit balances and debit balances shown in the left column
Balance sheet has both a Report form and Account form. Within Report form, asset, liability and equity accounts are presented in a vertical format. Within Account form, the right side represents liabilities and equities, and assets are indicated in the left side
Trial balance includes real, personal and nominal account
Balance sheet only includes real and personal account
The purpose of trial balance is to ascertain the arithmetical accuracy in the items and expenses recorded and posted
The purpose of balance sheet is to determine a company’s financial position on a given date
Inclusion in Financial statement
Trial balance is only a list of accounts, and it is not included in the financial statement
Balance sheet is an integral part of the financial statement
Signature of Auditor
As trial balance is not a part of financial statements, there is no need for the signature of auditor
Balance sheet is one of the important documents in the financial statement. Hence, auditor’s signature is mandatory
Trial balance is intended for internal reporting
Balance sheet is prepared for external reporting
Trial balance may be prepared multiple times in the course of an accounting year
Balance sheet is prepared only once at the conclusion of an accounting year
Trial balance need not to be presented before any entity
Balance sheet has to be presented before the Registrar of Companies if the operating entity is a company
Table 1: Trial balance and balance sheet difference
Trial Balance Example
Let, the following be the trial balance of a consulting company, XYZ.
Table 2: Trial balance of XYZ
Table 2 shows that the credit equals the debit. However, the figures in the trial balance do not indicate accuracy, and it is entirely possible that an item or transaction may have been missed or a wrong expense account has been entered.
Balance Sheet Example
Total Liabilities and Equity
Table 3: Balance sheet of XYZ
A balance sheet can be presented in two formats – (a) report form and (b) account form. Table 3 shows the balance sheet of XYZ in report form.
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1. What is a Balance Sheet?
A balance sheet is essentially a financial statement indicating a company’s liabilities, assets as well as equities held by shareholders within a specific duration. Balance sheet acts as the basis for computation of the rate of return and the evaluation of its capital structure.
2. What is Trial Balance?
Trial balance is primarily an accounting report that helps in balancing the general ledger accounts of a company. In a trial balance report, it can be seen that one column includes credit amounts, and the other, debit amounts. It has to be noted that the aggregate of these two columns should have to be necessarily identical.
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