Financial statements communicate a company’s financial information to stakeholders. They provide insight into an entity’s assets, liabilities, equity, income, and expenses.
A trial balance and a balance sheet are connected through the accounting process. The trial balance is prepared before the financial statements. It is essentially an internal report, a list of all ledger accounts and their balances at a given time. The balance sheet, on the other hand, presents a snapshot of the company’s financial position at a specific point in time.
Is Trial Balance Same as Balance Sheet?
No, a trial balance is not the same as a balance sheet. They are distinct documents serving different purposes. A trial balance is a financial report that lists all the general ledger account balances at a specific point in time. In contrast, a balance sheet reflects a company’s financial standing at a specific point in time.
Trial Balance vs. Balance Sheet
The trial balance is an internal document that does not follow any set format. But, the balance sheet is a financial statement that is presented to the stakeholders. So, it does have a format.
| Basis | Trial Balance | Balance Sheet |
|---|---|---|
| Definition | An internal report listing all ledger accounts and their debit or credit balances at a given date. | It is essentially a worksheet for accounting use. |
| Purpose | To verify that total debits equal total credits in the ledger. | To present the financial health and net worth of the business to stakeholders. |
| Formal Status | Not a formal financial statement | Not a formal financial statement A formal financial statement usually seen by investors or creditors. |
| Frequency | Prepared as needed internally, typically at the end of every reporting period (monthly, quarterly, yearly). | Prepared at each reporting period’s end in accordance with reporting requirements. Public companies often produce balance sheets quarterly and annually for external reporting. Private companies at least annually (and sometimes quarterly) for stakeholders like banks or investors. |
| Accounts Included | All accounts from the general ledger are included. | Only balance sheet accounts (permanent accounts) are included: assets, liabilities, and equity. |
| Accounts Included | All accounts from the general ledger are included. | Only balance sheet accounts (permanent accounts) are included: assets, liabilities, and equity. |
| Aggregation Level | Aggregation Level Very detailed – it shows each account’s individual ending balance. | Summarized – accounts are aggregated into meaningful line items. |
| Users | Used by internal users: primarily accountants and auditors. | Used by both internal and external users: management, but also investors, creditors, regulators, etc. |
| Relationship | Serves as a prerequisite for financial statements. | The balance sheet is derived from the trial balance (after adjustments and closing entries). |
Trial Balance
A trial balance is an accounting report that lists all accounts from the general ledger along with their ending debit or credit balances. Businesses usually prepare a trial balance at the end of an accounting period (e.g., month, quarter, or year). It is the first step toward drafting financial statements.
The purpose of the trial balance is to verify that the total of all debit balances equals the total of all credit balances. This is to ensure the accuracy of the bookkeeping entries.
Components of a Trial Balance
A trial balance is structured in a two-column format – one column for debit balances and another for credit balances. Each line of the trial balance corresponds to one account from the ledger.
The account names are listed usually in financial statement order or chart of accounts order. These often start with assets, then liabilities, and equity, followed by revenue and expense accounts.
- Account Names/Descriptions: Every account from the general ledger that has a non-zero balance (and sometimes even those with zero balance, for completeness) is listed. This includes all assets, liability, equity, revenue, and expense accounts.
- Debit Column: The ending balance of each account that has a debit balance is recorded in this column.
- Credit Column: The ending balance of each account that has a credit balance is recorded in this column.
- Totals: At the bottom, the sum of the debit column and the sum of the credit column are calculated. These totals must be equal for the trial balance to be accurate.
Trial Balance in the Accounting Process
Preparing a trial balance is a step that comes before the preparation of financial statements.
Transactions are first recorded as journal entries, then posted to ledger accounts. Once all postings for the period are done (including adjustments), a trial balance is extracted from the ledger.
Once the trial balance is prepared, the data is used to prepare the financial statements. Essentially, the accounts in the trial balance are split into two groups:
- Balance Sheet accounts: Assets, Liabilities, and Equity accounts will appear on the balance sheet.
- Income Statement accounts: Revenue and Expense accounts will be used to create the income statement (and ultimately closed to equity, affecting the balance sheet via retained earnings).
Why Trial Balances are Used to Check Accuracy
The primary accuracy check is the equality of debits and credits. Under double-entry accounting, every transaction affects at least two accounts: debit in one, credit in another. Therefore, if every transaction has been recorded correctly, the sum of all debit entries should match the sum of all credit entries.
By reviewing the trial balance, accountants can catch various types of errors:
- Transposition or calculation errors: If a number was transposed (e.g., 954 written as 594) or added incorrectly, the debit-credit totals will differ, flagging an issue.
- Single-sided entries: If a journal entry was posted only to one account (debit without credit or vice versa), the totals will not match.
- Certain conceptual errors: While a trial balance won’t catch every mistake, it can highlight unusual balances. Accountants often scan the trial balance for any account balances that “look wrong” as a cue to investigate further.
Balance Sheet
A balance sheet is a formal financial statement that provides a snapshot of a company’s financial position at a specific point in time. The balance is prepared based on the following accounting equation:
Assets = Liabilities + Equity
The purpose of the balance sheet is to answer questions like: “What does the company own? What does it owe? How much of the assets are funded by owners’ investment versus creditors’ funds?”
By examining a balance sheet, one can determine a company’s liquidity (through current assets and liabilities), solvency (through total debts vs. equity), and overall financial stability.
Components of a Balance Sheet
The balance sheet has three main components – Assets, Liabilities, and Owner’s Equity.
- Assets: Assets are resources owned or controlled by the business that are expected to provide future monetary benefits. Assets on a balance sheet include cash, accounts receivable, inventory, property, plant and equipment, investments, and intangibles (like patents or goodwill).
- Liabilities: Liabilities represent the obligations of the company. This includes loans, accounts payable to suppliers, salaries payable to employees, taxes owed, and other debts or obligations. In simple terms, liabilities are what the company owes.
- Shareholder’s Equity / Owner’s Equity: Equity represents the owners’ residual interest in the assets of the company after deducting liabilities. It includes items like paid-in capital (common stock, preferred stock, etc.), retained earnings (accumulated profits not distributed as dividends), and reserves.
Structure of a Balance Sheet
Balance sheets are organized by liquidity for assets and by maturity for liabilities. Additionally, in most accounting frameworks, a distinction is made between current and noncurrent assets and liabilities.
- Current Assets: These are assets expected to be converted to cash, sold, or consumed within one year or within the operating cycle of the business (whichever is longer). Common current assets include cash and cash equivalents, short-term investments, accounts receivable, inventory, and prepaid expenses. They are listed in order of liquidity (cash first, then receivables, inventory, etc.)
- Non-Current Assets or Long-term Assets: These are the assets that are held for more than one year. They include long-term investments, property, plant and equipment (PPE), intangible assets (like patents, trademarks, goodwill), and other assets like long-term receivables. Non-current assets are often listed after current assets, sometimes with subcategories such as “Fixed Assets” for tangible long-lived assets, and “Intangibles” for non-physical assets.
- Current Liabilities: These are obligations the company must settle within one year (or one operating cycle). These usually include accounts payable, short-term borrowings, the current portion of long-term debt (the part due within the next year), accrued expenses (like wages payable, interest payable), and taxes payable.
- Non-Current Liabilities: These are obligations due beyond one year. Examples are long-term loans, bonds payable, deferred tax liabilities, and long-term lease obligations. These appear after current liabilities on the balance sheet.
There are two common presentation formats for balance sheets:
- Account format (Horizontal): Assets on the left side; Liabilities and Equity on the right side. Totals on each side are equal. This format resembles a T-account.
- Report format (Vertical): Assets at the top, followed by Liabilities, then Equity at the bottom. This is more common in reports and easier to display on a page or screen. The total assets figure is presented and below is the total of liabilities and equity.
How a Balance Sheet Reflects the Financial Health of a Business
Using a balance sheet, stakeholders can derive insights into several aspects of financial health:
- Liquidity: This refers to the company’s ability to meet short-term obligations. By comparing current assets to current liabilities, one can assess if the company has sufficient resources to cover its near-term debts.
- Solvency and Leverage: The balance sheet shows how the company’s assets are financed – through debt (liabilities) or equity. A company with very high liabilities relative to equity may be heavily leveraged and riskier.
- Operational Efficiency: By looking at certain asset levels in combination with income statement information, one can gauge efficiency. For example, inventory levels (from the balance sheet) relative to the cost of goods sold (from the income statement) indicate inventory turnover.
- Financial Flexibility: The equity and debt on the balance sheet shows the company’s flexibility in obtaining more capital. A strong equity position and low debt might mean the company can safely take on more debt if needed.
- Trends in Financial Position: By comparing balance sheets over time (e.g., current year vs. prior year), one can see trends such as growth in assets, accumulation of debt, changes in cash reserves, etc.
Steps to Prepare a Trial Balance
Preparing a trial balance is a straightforward process once the general ledger has been updated for all transactions of the period. Here are the typical steps to prepare a trial balance.
Step 1: List All Ledger Accounts and Balances
Gather the ending balance of every account from the general ledger as of the trial balance date. This includes assets, liabilities, equity, revenue, and expense accounts. For each account, determine the net balance. List each account’s name in a worksheet or trial balance template, with a space for its debit or credit balance.
Step 2: Enter Balances in Debit or Credit Column
If an account has a debit balance, enter that amount in the debit column; if it has a credit balance, enter it in the credit column. Typically, asset and expense accounts have debit balances, while liability, equity, and revenue accounts have credit balances.
Total the Debit and Credit Columns. Identify and Correct Any Discrepancies.
Step 3: Extend to Adjusted Trial Balance
Accountants often prepare an unadjusted trial balance first then make adjusting entries for accruals, deferrals, etc. They incorporate those adjustments to produce an adjusted trial balance. This adjusted trial balance will then be used for the financial statements.
Steps to Prepare a Balance Sheet
Once the trial balance is ready, preparing the balance sheet involves organizing the relevant account balances into the proper format.
Step 1: Set the Reporting Date and Gather Trial Balance Data
Determine the date for which the balance sheet is being prepared (e.g., “as of December 31, 2025”). Use the finalized trial balance as of that date to get all account balances.
Step 2: Identify and Separate Balance Sheet Accounts
From the trial balance, filter out the accounts that belong on the balance sheet i.e., all assets, liability, and equity accounts. Exclude any revenue and expense accounts, since those are for the income statement.
Step 3: Classify Assets and Liabilities into Subcategories
Organize the selected accounts into meaningful subcategories, typically Current vs. Non-Current. Under Assets, group all current assets and all non-current assets together.
Step 4: Calculate Totals for Assets, Liabilities, and Equity
Sum up the asset side and the liabilities plus equity side. First, compute Total Assets by adding Current Asset total and Non-Current Asset total (or by summing all asset lines directly).
Then compute Total Liabilities by adding Current Liabilities and Non-Current Liabilities. Next, calculate Total Equity by summing all equity accounts (common stock, retained earnings, etc.). Now, calculate Total Liabilities and Equity by adding the total liabilities and total equity together.
Step 5: Ensure Proper Presentation and Compliance
With the numbers in place and balanced, present the balance sheet in a clean format. At the top, include a header with the company name, the title “Balance Sheet”, and the date (for example, “As of 31 December 2025”). Organize the sections (Assets, Liabilities, Equity) clearly, using underlines or bold for totals and subtotals as needed. Decide on the format (vertical vs. horizontal) as appropriate.
Common Errors in Trial Balance and Balance Sheet
Despite careful preparation, errors can occasionally slip into trial balances or balance sheets. The issues can occur in recording, classifying, applying, or even presenting.
Recording Errors in the Ledger: These are made at the journal entry or posting stage which then flow into the trial balance. For example, if a transaction was recorded twice or not at all, the trial balance might still balance. And thus it will not immediately reveal the error.
Misclassification of Accounts: This error means that an entry is recorded to the wrong account or category. Suppose an accountant accidentally posts a telephone bill payment to an asset account (say, Prepaid Expenses) instead of an expense account (Utilities Expense), or records a personal expense of the owner as a business expense.
Omitting or Incorrectly Applying Adjusting Entries: Adjusting entries is necessary to bring accounts up to date (for accrued expenses, depreciation, etc.) at the end of the period. If these adjustments are omitted or wrong, both the trial balance and the balance sheet will be affected.
Errors in the Financial Statement Presentation: These occur when transferring data from the adjusted trial balance to the balance sheet or in the final assembly of the statement. For instance, an accountant might forget to include an asset that was on the trial balance in the balance sheet.
Example of a Trial Balance
Let’s look at a simplified example of a trial balance. Suppose XYZ Company has completed its transactions for the month of December:
| Particular | Debit (Tk) | Credit (Tk) |
|---|---|---|
| Cash | 3,000 | |
| Accounts Receivable | 5,000 | |
| Equipment | 5,000 | |
| Accounts Payable | 2,000 | |
| Loan Payable (Bank) | 3,000 | |
| Owner’s Capital | 5,000 | |
| Service Revenue | 5,000 | |
| Salary Expense | 1,500 | |
| Rent Expense | 500 | |
| Totals | 15,000 | 15,000 |
Example of a Balance Sheet
We can now prepare a simple balance sheet for XYZ Company using the trial balance from XYZ Company above. Assume that December 31, 20XX is the end of the accounting period and that the revenue and expense accounts will be closed to Owner’s Capital (or Retained Earnings, if we consider this a corporation) to recognize the net income of Tk 3,000. The balance sheet will then reflect the updated equity after profit.
XYZ Company
Balance Sheet
As of December 31, 20XX
| Assets | Amount (Tk) | Liabilities & Owner’s Equity | Amount (Tk) |
|---|---|---|---|
| Current Assets: Cash Accounts Receivable | 3,000 5,000 | Current Liabilities: Accounts Payable | 2,000 |
| Total Current Liabilities | 2,000 | ||
| Total Current Assets | 8,000 | ||
| Non-Current Liabilities: Loan Payable | 3,000 | ||
| Non-Current Assets: Equipment | 5,000 | ||
| Total Non-Current Liabilities | 3,000 | ||
| Total Non-Current Assets | 5,000 | ||
| Total Liabilities | 5,000 | ||
| Owner’s Equity: Owner’s Capital Retained Earnings | 5,000 3,000 | ||
| Total Owner’s Equity | 8,000 | ||
| Total Assets | 13,000 | Total Liabilities & Equity | 13,000 |
Conclusion
Trial balance and balance sheet are two distinct but interrelated elements of accounting. The trial balance is an internal report ensuring the ledger’s debits and credits are balanced. The balance sheet, conversely, is a financial statement that presents a company’s financial position and the net worth attributable to its owners.
An error-free trial balance leads to a reliable balance sheet. On the other hand, a meticulously prepared balance sheet provides stakeholders with invaluable information about the company’s liquidity, solvency, and overall financial stability. Accounting professionals should ensure that both are handled with care.
Frequently Asked Questions
A trial balance is typically prepared at the end of an accounting period (monthly, quarterly, or annually), after posting all journal entries into ledger accounts.
Balance sheets must balance because they reflect the fundamental accounting equation:
Assets = Liabilities + Equity
This equation must always hold true, meaning that total assets are always equal to the combined total of liabilities and equity. Any discrepancy signals errors in accounting records.
You don’t directly create a trial balance from a balance sheet; rather, a trial balance is prepared first, and the balance sheet is then derived from it. However, if you already have a balance sheet and need to approximate a trial balance, you can list asset accounts as debit entries and liabilities and equity accounts as credit entries, confirming that totals on both sides remain equal.
The main difference between a trial balance and a balance sheet is their purpose, content, and audience. A trial balance is an internal accounting tool primarily used to verify the accuracy of ledger accounts by ensuring that total debit balances equal total credit balances.
In contrast, a balance sheet is a formal financial statement intended for external stakeholders, summarizing the company’s financial position at a specific date. Unlike the trial balance, it includes only permanent accounts, assets, liabilities, and equity.
