The expansion of commerce beyond territorial limits required adequate procedures for bookkeeping. The bookkeeping system failed to cope with the mammoth growth of commerce. To efficiently record the complex and increasing transactions with other countries, the double-entry bookkeeping system came to being. In the modern-day world, a trial balance and a balance sheet are two types of double-entry bookkeeping procedures.
Trial Balance vs Balance Sheet
The main difference between Trial Balance and Balance Sheet is that while the former is a statement of the company’s debit balances and credit balances from its general ledger on certain dates, the latter is a more detailed statement containing details of the company’s total liabilities and assets along with the capital that is put in by the shareholders of the company.
A trial balance entails the debit balances and credit balances from the company’s general ledger. The law dictates that it is not mandatory for a company to prepare a trial balance. A trial balance sheet is divided into the ‘debit’ and ‘credit’ columns to record the same on certain dates.
A balance sheet is a detailed statement of a company’s total assets and liabilities, along with the capital that is put in by the company’s shareholders. The law concerning balance sheets provides that all companies must maintain a balance sheet. A balance sheet is divided into three columns of ‘total assets’, ‘total liabilities’, and ‘stockholders’ equity’.
Comparison Between Trial Balance and Balance Sheet
| Parameters of Comparison | Trial Balance | Balance Sheet |
| Meaning | A sheet bearing records of the balances of both credit and debit of a company that is taken from the ledgers on certain dates | A statement of the complete liabilities and assets of the company along with the capital that the shareholders put into it. |
| Purpose | To cross-check for any mistakes that could have happened while entering the debit or the credit details. | It gives an idea about the financial condition of the company to the existing as well as potential investors. |
| Source | General ledgers | Trial balances are taken into consideration |
| Authorization | It does not require an auditor’s authorization | Requires an auditor’s authorization |
| Format | It must be divided into Credit and Debit columns | Must be under heads as- Total Assets, Total Liabilities, and Stockholders’ Equity |
What is Trial Balance?
Trial balance is a type of double-entry bookkeeping procedure that was introduced to efficiently track and record a company’s balances (both credit and debit) while dealing with other national and international companies.
It is a statement containing the balances (both credit and debit) of a company that is taken from its ledger accounts. A trial balance is typically divided under the heads Credit and Debit.
Trial balance proves to be very crucial in detecting any mistake that could have taken place during the entry of the balances. However, it is not a part of the company’s finalized accounts. It is only used for the internal purposes of a company. Therefore, it is not necessary to take an auditor’s authorization to prepare a trial balance.
The basic information to prepare a trial balance is taken from the company’s ledgers. It is taken into account to ensure that, in the end, the total liabilities as against the total debit balances should be the equal amount.
Trial balances are made on a certain specific date of a month. Generally, the last date of a month or a year is preferable.
A unique aspect of a trial balance is that the law does not require a company to mandatorily prepare it. It is the company’s choice. Therefore, there is no set arrangement of ledger balances to be followed while preparing a trial balance.
What is Balance Sheet?
A balance sheet, like a trial balance, is a type of double-entry bookkeeping system, but it differs from a trial balance in almost every respect. It is a statement that entails the details about a company’s total liabilities as against its total assets along with the total capital that is put in by the shareholders in the company. It is therefore divided into three heads: Total Assets, Total Liabilities, and Stockholders’ Equity.
The balance sheet comes in really handy to a company when it has to demonstrate its existing financial situation to retain as well as attract prospective investors. It is generally regarded as a company’s financial statement, and when the accounts are being finalized, a balance sheet forms a part of it.
The law requires that all companies prepare balance sheets, and it needs to be authorized by an auditor.
Trial balance acts as a major source to make a balance sheet.
The purpose that a balance sheet serves is that it indicates the company’s financial situation and also depicts the accuracy of its financial affairs.
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.
Main Differences Between Trial Balance and Balance Sheet
- A trial balance contains the records of the balances (both credit and debit) of a company that is taken from the company’s ledger accounts. On the other hand, a balance sheet is a detailed sheet containing the statements depicting the total assets as against the total liabilities of the company, and sometimes also includes the total capital that is put in by the existing shareholders in it.
- While a trial balance cannot be considered as a part of a company’s financial statements, a balance sheet is that detailed sheet that is often called the financial statement of a company.
- Opening stocks are taken into consideration while preparing a trial balance. In contrast, closing stocks are considered while preparing a balance sheet.
- A trial balance displays the “real”, “nominal”, and “personal accounts”, whereas only the “real” and “personal” accounts are displayed in a balance sheet.
- Where the companies generally use a trial balance as a reference to their internal financial affairs, a balance sheet is typically prepared to give an overall insight into the company’s existing situation, thereby making it useful for external affairs.
Conclusion
Trial balance and balance sheet are two types of double-entry bookkeeping procedures but vary from one another in terms of definition, purpose, format, application, source, recurrence, etc. While a trial balance helps a company keep track of its internal financial affairs, a balance sheet is used by the companies to give an idea about their financial situation to the potential investors, thereby making it an essential tool concerning its external affairs.
Another crucial aspect that differentiates a trial balance from a balance sheet is that while the law does not dictate that the companies have to prepare the former, they must prepare the latter. Consequently, while there is no need to adhere to a set arrangement of any sort to make a trial balance, it is of utmost importance to comply with the standard arrangement in place while preparing a balance sheet.
References
- https://www.jstor.org/stable/242165
- https://link.springer.com/chapter/10.1007/978-1-349-09460-8_5