Trial Balance: Definition, How It Works, Purpose, and Requirements

The balance sheet summarizes and reports the balances from the asset, liability, and stockholders’ equity accounts that are contained in the company’s general ledger. The balance sheet is also referred to as the statement of financial position. A trial balance includes a list of all general ledger account totals. Each account should include an account number, description of the account, and its final debit/credit balance. In addition, it should state the final date of the accounting period for which the report is created. The main difference from the general ledger is that the general ledger shows all of the transactions by account, whereas the trial balance only shows the account totals, not each separate transaction.

If there is a mismatch, an account called the suspense account is used to adjust the difference value and balance the trial balance. The books of accounts would then have to be examined to trace the source of the error. This would then be rectified so that the trial balance is perfectly balanced.

  • A trial balance is so called because it provides a test of a fundamental aspect of a set of books, but is not a full audit of them.
  • A balance sheet can only be made when all accrual entries (prepaid and outstanding) have been adjusted.
  • In other words, a trial balance is more or less a type of sheet that is used to record all sorts of ledger balances that are classified as debit and credit.
  • Various key ratio analysis can also be done from the information presented in the balance sheet.
  • The signature of the auditor is not required to prove the accuracy of the Trial balance.

While many people consider both the same, many others fail to differentiate between the two. Such information is particularly crucial for such investors who seek to derive insights on the operations a periodic grain consolidation model of porous media and financial health of a company for considering whether it will be a sound investment option. But it is mandatory to create a balance sheet to know the financial condition of an organization.

Features of a Trial Balance

The general purpose of producing a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct. A trial balance is a report that is used internally within the company, while the balance sheet is usually released to investors and financial institutions outside the company. The primary function of the trial balance is to see if the total credits and debits in the books of account balance with each other. You can prepare a trial balance for every month or even every quarter. The balance sheet, however, is a document that is prepared for each financial year. The key differences between trial balance vs balance sheet can be summarized in the following table.

As part of the closing process at the end of an accounting period, balance sheet accounts must be reconciled, and adjusting entries must be posted. Companies that carry inventory need to count their closing stock so that the Cost of Goods Sold can be calculated appropriately. A trial balance is prepared after the accountant has successfully closed all the general ledger accounts. At the same time, a balance sheet is prepared after preparing the trial balance.

Differences Between Trial Balance And Balance Sheet

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. The main purpose is to detect if there are any numerical errors that might have occurred while the double-entry system of accounting.

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External users use balance sheets to assess a company’s financial status and liquidity. Both sets of users may rely on ratios to compare the company’s financial position to benchmarks. According to this equation, an organization’s assets must be balanced by the sum of its liabilities plus shareholders’ equity. A balance sheet that doesn’t balance is a sign of errors in accounting records. A balance sheet is ideally prepared on the last day of a financial year, and it is of utmost importance to follow the set arrangement of total assets, liabilities, and stockholders’ equity.

Trial Balance vs Balance Sheet

Accounts in the trial balance are split between balance sheet accounts and income statement accounts. The balance sheet accounts and their balances are sorted into assets, liabilities, and owner’s equity to create the balance sheet. 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.

Balance sheet acts as the basis for computation of the rate of return and the evaluation of its capital structure. While in the statement of financial position or balance sheet, only capital accounts are written. On the other hand, the signature of the auditor is required to prove the accuracy of the liabilities and capital presented in the statement of financial position or balance sheet. While balance sheet or statement of financial position lists the assets, liabilities, and ownership of the organization. The term profit and loss (P&L) will refer to your financial statement. It occupies and summarizes all your business’s expenses, revenue, and costs caused during the specific time.

The company will prepare its balance sheet for both internal and external use. Conversely, the company will prepare the trial balance for only the purpose of internal use. Once the trading and P&L Account preparation are complete, the balance sheet is prepared. The firm will tend to prepare the trial balance after posting it into the ledger. But, the balance sheet comes under one of the financial statements. The balance sheet is a package of assets and liabilities statements, but the profit and loss account (P&L) is an account.

The trial balance is an internal document used as the first step in creating financial statements. It lists all the financial accounts and their ledger balances on a specific date. That date may be the end of the financial year, the end of a quarter, or the last day of the month, depending on the period that is being reported on.

Debits and credits of a trial balance must tally to ensure that there are no mathematical errors. However, there still could be mistakes or errors in the accounting systems. A trial balance can be used to assess the financial position of a company between full annual audits. Companies can use a trial balance to keep track of their financial position, and so they may prepare several different types of trial balance throughout the financial year. A trial balance may contain all the major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses.

All three of these types have exactly the same format but slightly different uses. The unadjusted trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record of day-to-day transactions and can be used to balance a ledger by adjusting entries. A trial balance is a statement which lists all the balances of the Real, Personal and Nominal Accounts irrespective of the Capital or Revenue nature of the accounts. If the recording and posting of the transactions take place properly and systematically, then the total of both columns would be identical.