The accounting cycle of an organisation includes all the processes that lead to the presentation of financial statements of the organisation. This starts from charting of all accounts to journalizing to posting to preparing income statement (profit and loss account) and finally financial statement (balance sheet).
The trial balance and balance sheet are very important and they play a vital role in checking the arithmetical accuracy of ledger balances and also show the financial state of company.
In this article, we will analyze the meaning and differences between trial balance and balance sheet.
Trial balance sheet often called trial balance is a complete listing of all account balances of the ledger at the end of a reporting period. These account balances include all real, personal and nominal account balances.
Trial balance is prepared by a bookkeeper once all journal entries are posted to the respective ledger accounts and each ledger account is added together and balanced. The trial balance is prepared in columnar format, with debit account balances recorded on the left and credit account balances recorded on the right. The are also columns for date and particular
An example of a trial balance is as follows:
A balance sheet is a financial statement which shows the position of assets and liabilities of an organisation for a given period. This date that the balance sheet is prepared is generally the last date of the accounting period i.e Prepare a balance sheet at December 31, 20...
Assets are what an organization own which can be converted into monetary value. These include fixed assets: Land and building, plants and machineries, dues receivable etc. Liabilities represent what an organization owe, they are future monetary obligations to outsiders. This includes all amounts that are payable and outstanding at the reporting date. The owner’s equity in the business represents the net difference between the assets and liabilities.
Thus, the balance sheet is an overview of what the company owns and what the company owes including the value of owner’s equity. The balance sheet is important for different stakeholders to comprehend the financial position of an organisation at any specific period.
A format of the balance sheet extracted from the trial balance in the above example is shown below:
Nominal account balances from trial balance are posted to the income statement to derive the net profit. Afterwards, this net profit as well as the balances of real and personal accounts from the trial balance is transferred to the balance sheet. Balance sheet is prepared in ‘T’ format with assets recorded on the right and liabilities recorded on the left.
This completes the accounting cycle.
The financial information disclosed by the balance sheet is important for several stakeholders, some of them are:
The management of an organization uses the balance sheet to understand financial implications of the business operations and to ascertain future course of action for the business.
Investors and potential investors
The balance sheet helps to measure the security and growth potential of their investment in the company.
The balance sheet helps to measure credibility and business prospects of the company.
It helps to ascertain credit worthiness of the company and its capacity to repay loans collected.
Balance sheet helps to monitor the financial state of the company especially if it involves public funds, in cases of listed companies or companies accepting deposits from the general public.
Differences between trial balance and balance sheet:
The difference between trial balance and balance sheet has been properly stated below:
- Trial balance is a compiled list that contains all ledger account balances
- Balance sheet is a financial statement which shows the financial state of the company i.e., the net position of assets and liabilities of a company on the final day of reporting period.
- Trial balance is prepared as soon as all ledger accounts are added and balanced
- Balance sheet is prepared once trial balance is prepared and subsequent to prepare income statement (profit and loss account).
- Trial balance includes the balances of all real, personal and nominal account.
- Balance sheet includes only real and personal account balances. Nominal account balances are accounted for through income statement.
- Trial balance is reported in columnar format with debit balances in the left column and credit balances in the right column, particular column is also added.
- Balance sheet is prepared in ‘T’ format with assets on the right side and liabilities on the left side.
- The main objective of preparing a trial balance is to examine the arithmetical accuracy of books of accounts.
- The main aim of preparing the balance sheet is to summarize and present a clear view of the financial state of the company.
- Trial balance is just a list of accounts and not regarded as a financial statement for the purpose of reporting.
- Balance sheet is a key financial statement.
- Trial balance is an internal purpose document and does not require auditor sign off because it is not a financial statement.
- Balance sheet is prepared for external use and needs auditor sign off in cases where audit is applicable.
Primarily, the trial balance is used internally by accountants and auditors to inspect the arithmetical accuracy of books of accounts. On the other hand, balance sheet plays a more important role in the accounting cycle as it is reported externally and trusted by several stakeholders of the company. Accountants and auditors thus focus on ensuring that the balance sheet presentation is accurate.