A balance sheet and trial balance are two important reports of the accounting system. The balance sheet is one of the three financial statements that a company needs to file mandatorily under accounting principles. On the other hand, the trial balance is usually for the internal purposes of the company. Though both serve different purposes, they are very important for a business. To understand the use and importance of both, we need to see the differences between Trial Balance vs Balance Sheet.
Trial Balance vs Balance Sheet – Differences
Following are the differences between trial balance vs balance sheet:
A trial balance is basically a list of ending balances of all ledger account balances. On the other hand, a balance sheet reports the net position of a company’s assets and liabilities.
Generally Accepted Accounting Principles (GAAP)
Under the accounting principles known as GAAP, a company needs to prepare a balance sheet along with the income statement and cash flow statement. Trail balance, on the other hand, is not a mandatory statement. Companies usually prepare it for their internal purposes only.
The trial balance could be said as the base of all three financial statements. It includes information about general ledger accounts. These ledger accounts include details of all transactions, which in turn, are based on journal entries.
The balance sheet does not show the ledger balances. Instead, it is more concerned about the assets and liabilities of an organization. It is prepared to understand the financial position of a company, including the assets it has and liabilities it needs to pay off.
Trial balance lists all three types of accounts – real, personal and nominal. The balance sheet considers only real and personal accounts. Balances of nominal accounts come in the profit and loss accounts.
Even though the trial balance is only for internal purposes, there is a format that all the companies follow. The trial balance is usually prepared in columnar format, wherein the debit balance is posted in the left column, and the credit balance is mentioned in the right column.
On the other hand, the balance sheet is usually prepared in the ‘T’ format. Under this, the accountant lists assets on the right side, while liabilities come on the left side.
While one can prepare a balance sheet from the Trial balance, the opposite does not hold true. However, talking of importance, a balance sheet is more important as it shows the financial position of a company. On the other hand, a trial balance is merely a summary of balances.
Companies prepare trial balances to identify any mathematical errors present in their double-entry accounting system. If the total of the debit side is equal to the total credit side, it means the ledger is free of any mathematical error.
On the other hand, A balance sheet helps to understand the financial position of a company. It records the total assets and total liabilities. Every company needs to prepare a balance sheet to know its financial position. The balance sheet is also important for the stakeholders, such as investors, analysts, creditors, and more.
Effect of Adjusted Entries
The accounts department prepares the trial balance to know the mathematical error (if any). Therefore, it is prepared before any adjustments. On the other hand, the balance sheet is prepared towards the end of the financial year, and therefore, all the adjustments are taken in.
The trial balance includes information about the opening stock. On the other hand, the balance sheet includes information about the closing stock.
Proof in Court
A company can’t produce a trial balance as proof in court. On the other hand, a company (or anyone else) can produce the balance sheet as proof in courts across the globe. This is because the balance sheet is in accordance with the GAAP, whereas the trial balance is not.
When it’s Prepared?
An accountant starts preparing trial balances after posting all journal entries and completing all ledger accounts. An accountant prepares a balance sheet after preparing a profit and loss account and cash flow statement.
An accountant usually prepares a trial balance at the end of a specified period. For example, Trial Balance for XYZ for the year ended XXXX. On the other hand, a balance sheet is prepared for a company as on a specific date—for example, the Balance Sheet for XYZ as on 31st Dec, XXXX.
Since trial balance is not part of the financial statement, it does not need to be audited. On the other hand, the balance sheet is an important financial statement and thus, needs to be audited wherever applicable.
The trial balance is the middle stage in the accounts preparation, while the balance sheet is the last stage.
A trial balance is accurate if the total of the debit side equals the credit side. The balance sheet is accurate if the assets side equals the liabilities side.
After reading the above differences between trial balance vs balance sheet, you now know that both are very different from each other. Though trial balance may not seem as important as a balance sheet, it holds importance to the accounts department as it ensures the accuracy of the accounting system. On the other hand, the balance sheet holds importance to those outside the company as well, such as investors, analysts, and more.