The trial balance is an internal report used to determine whether total debits total credits

The key difference between Trial Balance vs. a Balance sheet is that Trial Balance is the report of accounting in which ending balances of different General ledgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read more of the company are presented in the debit column or the credit column. In contrast, the Balance sheet is one of the company’s financial statements that present the shareholders’ equity, liabilities, and the company’s assets at a particular point in time.

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.

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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 –

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What is Trial Balance?

The trial balance is the total of all the end balances directly taken from the ledger accounts to see whether the total of debitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more 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 accountingTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more?

So, we will learn these four concepts first before going into the trial balance formatTrial Balance has a tabular format that shows details of all ledger's balances in one place. As every organization must analyze its financial condition over a specific period of time, it contains transactions done during the year as well as the opening and closing balances of ledgers.read more with examples.

Debit & Credit

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 accountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.read more, 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. CreditA debit is a left-hand accounting entry that increases an asset or expense account while decreasing a liability or equity account. Credit, on the other hand, is a right-hand accounting entry that decreases an asset or expense account while increasing a liability or equity account.read more.

Journal entry

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

Ledger Entry

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

Introduction of trial balance

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 accountTemporary accounts are nominal accounts that start with zero balance at the beginning of the financial year. The balance is visible in the income statement at the year-end and then transferred to the permanent as reserves and surplus.read more 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 accountSuspense Account is a general ledger account that holds records of temporary transactions that which do not have sufficient evidence for double entry or appropriate vouchers. This account is settled within the accounting period and does not appear anywhere in the financial statements.read more 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 balanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more is less than the credit balance, we created a suspense account to match up debit and credit balances until we find the error.

Example and format of Trial Balance

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

What is the Balance Sheet?

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” –

Have a look at the example of current assets –

After current assetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more, 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 assetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more
• Investments in associates & joint venturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more
• Financial assetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more
• 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 –

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 –

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

Key differences – Trial Balance vs. Balance Sheet

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.

Trial Balance vs. Balance Sheet (Comparison Table)

Here is a quick comparison chartA comparison chart represents various informational values linked to the same categories (for example, region-wise sales, city-wise sales), depicting a complete comparison between them and helps in decision-making process.read more highlighting the Trial Balance vs. Balance Sheet differences.

Conclusion

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.

Trial Balance vs. Balance Sheet Video

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