What is a Trial Balance?
The report lists the balances of a company at a certain point in time of all the general ledger accounts. The accounts that are reflected on the trial balance are all related to major accounting items such as equity, assets, revenues, liabilities, expenses, losses, and gains. The trial balance is generally used to identify at a certain point in time, the credit entries and the balance of debits from the transactions that are recorded in the general ledger.
Features of a Trial Balance
The trial balance usually includes a list of totals of accounts of the general ledger. The general ledger accounts should include the description of the account, the account number, and the final debit/credit balance. Along with this, the trial balance should include the accounting period of the report being created. The trial balance does not show each separate transaction, only the accounts total whereas the general ledges show all the transactions of the account. If any adjusting entries were entered, the trial balance should show the adjusting entry, the figures before the adjustment, and the balances after the adjustment.
What is a Balance Sheet?
The balance sheet is a key part of both financial modeling and accounting. The company’s total assets and how they are financed, either by debt or equity, are displayed in the balance sheet. The balance sheet can also be described as a statement of financial position or a statement of net worth. The fundamental equation that describes the balance sheet is Assets = Liabilities + Equity.
Features of a Balance Sheet
In a balance sheet, the assets and the liabilities are divided into two separate categories which include current assets or current liabilities and noncurrent (long term assets) or noncurrent liabilities. After the illiquid accounts or non-current accounts such as plant, property, and equipment (PP & E) and the long-term debt, more liquid accounts are placed such as cash, inventory, and the trade payables.
Difference between a Trial Balance and a Balance Sheet
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.
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
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.
To know more about this, you can check various online study modules available on Vedantu’s website. Do not forget to install the app and boost your learning!
FAQs on Trial Balance vs. Balance Sheet: Main Differences
1. What is the main difference between a Trial Balance and a Balance Sheet?
The main difference lies in their purpose and scope. A Trial Balance is an internal document prepared to check the arithmetical accuracy of ledger postings by ensuring that total debits equal total credits. A Balance Sheet, on the other hand, is a formal financial statement that presents a company's financial position—its assets, liabilities, and equity—on a specific date to external stakeholders like investors and creditors.
2. What is the primary purpose of preparing a Trial Balance in accounting?
The primary purpose of a Trial Balance is to verify the mathematical correctness of the double-entry accounting system. It serves three main objectives:
- To ensure that the total of all debit balances from the ledger accounts equals the total of all credit balances.
- To help in locating and rectifying certain types of accounting errors before preparing final accounts.
- To provide a consolidated list of all ledger account balances, which serves as the basis for preparing the Trading and Profit & Loss Account and the Balance Sheet.
3. What are the main components of a Balance Sheet?
A Balance Sheet is structured around the fundamental accounting equation: Assets = Liabilities + Equity. Its main components are:
- Assets: Resources owned by the company, classified as Current Assets (e.g., cash, inventory, debtors) and Non-Current Assets (e.g., land, buildings, machinery).
- Liabilities: Obligations owed by the company, classified as Current Liabilities (e.g., creditors, bills payable) and Non-Current Liabilities (e.g., long-term loans, bonds).
- Equity: The owners' claim on the assets, which includes capital contributed by shareholders and retained earnings.
4. If a Trial Balance tallies, does it guarantee that the financial records are completely error-free?
No, a tallied Trial Balance does not guarantee a completely error-free set of books. It only confirms the arithmetical accuracy of postings. Certain errors, known as errors not disclosed by a Trial Balance, can still exist. These include:
- Errors of Omission: A transaction was completely missed from being recorded.
- Errors of Commission: A correct amount was posted to the wrong account but on the correct side (e.g., debiting Rent instead of Salaries).
- Errors of Principle: A transaction is recorded in violation of accounting principles (e.g., treating a capital expenditure as a revenue expense).
- Compensating Errors: Two or more errors cancel each other out.
5. How does a Trial Balance facilitate the preparation of a Balance Sheet?
The Trial Balance acts as a crucial bridge between the ledger and the final financial statements. All the accounts listed in the Trial Balance are categorised and transferred to either the Trading and Profit & Loss Account or the Balance Sheet. Specifically, all asset, liability, and capital accounts listed in the Trial Balance are carried forward to form the basis of the Balance Sheet, ensuring that the final statement is built upon arithmetically accurate balances.
6. Why is a Balance Sheet prepared on a specific date, whereas a Trial Balance can be prepared at any time?
This difference stems from their core functions. A Balance Sheet is a statement of financial position, intended to show what a company owns (assets) and owes (liabilities) at a single, static point in time (e.g., 'as on March 31, 2026'). A Trial Balance is a procedural tool used to check ledger accuracy. It can be prepared at any frequency—daily, weekly, monthly, or annually—to ensure the books are balanced before moving to the next accounting step.
7. Can a company prepare a Balance Sheet without first preparing a Trial Balance?
While theoretically possible for a very small business with few transactions, in standard accounting practice, it is not advisable or practical. Preparing a Trial Balance is a fundamental control step in the accounting cycle. Skipping it would mean preparing the Balance Sheet and other financial statements without first verifying the arithmetical accuracy of the ledger balances, significantly increasing the risk of material errors in the final reports.
