Trial Balance vs. Balance Sheet: Example, Usage & Format

Introduction

Be it a small startup or a large enterprise, accurate financial reporting relies heavily on understanding key accounting components.. Trial balance and balance sheet play an important role in determining account balances and ensuring accurate reporting within the double-entry bookkeeping system.

However, to ensure consistent and accurate financial reporting, it’s critical for businesses to get an in-depth understanding of these components. While trial balance is the first step to preparing a balance sheet by recording ending account balances to ensure debits equals credits, the balance sheet aggregates these ending balances into assets, liabilities and equity enabling us to understand the financial position of a company at a given point in time..

This blog takes a deep dive into trial balance vs. balance sheet – what are they, how they differ from each other, and how you can generate these financial statements.

What Is a Balance Sheet?

A balance sheet is a financial statement that records a business’s assets, liabilities, and equity. It is one of the three fundamental financial statements that give a snapshot of a business’s debt obligations, cash and bank balances, deferred revenues, fixed assets at a specific point in time.

A business can issue a balance sheet either for internal management use or for external stakeholders like investors and lenders. Balance sheets, especially those of public companies must comply with accounting standards like GAAP (Generally Accepted Accounting Principles) or Internal Financial Reporting Standards (IFRS). A general rule of the balance sheet is that it should adhere to the accounting equation that states that the amount of assets must match the amount of sum of its liabilities and equity at any given point in time.

For instance, if a business has to take a bank loan of $10,000 in cash payable within a year, it will add $10,000 in cash to the cash account and under the head “Current Assets” on the asset side. Simultaneously, it would need to add it as a “bank loan” under current liabilities on the liability side of the balance sheet to get both sides balanced.

Balance sheet example

Let’s take the example of Hershey Co. balance sheet statement for three consecutive years. It covers three main components:

• Assets

It includes cash, accounts receivable, prepaid expenses, buildings, furniture, and equipment. Assets can also be intangible, like trademarks or patents.

• Liabilities

These include short-term and long-term loans, contingencies, accrued income, accounts payable, etc.

• Shareholders equity

Also called owner’s or stockholder’s equity, it includes the business’s residual value after all debts have been settled.

Source

What Is a Trial Balance?

A trial balance is an internal statement that records the closing balance of all general ledgers on a specific date. A business must ensure that all the debit and credit balances are equal, complying with the principles of double entry bookkeeping. If the debit and credit side do not balance, it indicates potential accounting errors.

Trial balances are usually prepared monthly or quarterly so businesses can identify errors in the accounting books and rectify them proactively. This accounting statement is one of the most straightforward ways to detect errors and get them corrected. However, while trial balance is useful in detecting certain errors, it might not identify all errors especially when both the credit and debit entries are incorrect.

What do you mean by debit and credit in a trial balance?

A trial balance consists of two columns – one for debit and one for credit and transactions are recorded in either of the two columns. Any transaction will debit one general ledger account and credit another. Here are the general rules for recording transactions:

• Debit the asset or expense accounts if they increase and the liabilities or revenue accounts if they decrease.
• Credit the asset or expense account if they decrease and the liabilities or revenues if they increase.

So, if a business sells its goods and collects cash, it will increase the asset account (cash) and revenue or sales account. So, the business will debit the cash account and credit the revenue account. This double entry of debit and credit ensures compliance with the double entry principle in accounting..

What a trial balance cannot do

Despite being a critical accounting tool and ensuring arithmetic accuracy in the books of accounts, a trial balance cannot:

• Detect entries that a business misses altogether
• Identify incorrect amounts posted as debit or credit entries
• Detectentries posted twice
• Find out if the correct amount was recorded but in the wrong account.

Trial Balance Example 

Suppose a tech company, XYZ Inc., prepares a trial balance for the year ending in 2024, listing all ledger accounts with their respective debit and credit balances.

The debit side includes cash, accounts receivable, inventory, prepaid rent, equipment, rent expenses,utilities expenses, and salaries paid. Similarly, the total credits include accounts payable, notes payable, capital, and sales revenue.

What Are The Key Differences Between Trial Balance And Balance Sheet?

A trial balance lists closing balances from all general ledgers at a specific date. A balance sheet on the other hand uses the adjusted trial balance as a source to summarize the financial position at the end of an accounting period. . While trial balance helps check the mathematical accuracy of books of accounts, balance sheets highlight a business’s financial health and net worth.

Here are the key differences between trial balance and balance sheet:

Trial balance vs Balance Sheet: Aggregation, usage standards, reporting level, standards

• Aggregation

A trial balance aggregates transactions by all general ledger accounts to help identify accounting errors and get a nuanced picture of account balances. On the other hand, a balance sheet aggregates balances by categories of assets, liabilities, and equity to provide an overview of a business’s financial position at a given time.

• Standards

A balance sheet is prepared to comply with the rules provided by accounting standards like GAAP or IFRS, whereas a trial balance follows the double-entry bookkeeping system. The amounts appearing in a trial balance are divided into debit and credit columns. A balance sheet is divided into two parts, one showing assets and the other section showcasing liabilities and equity.

• Usage

Trial balance is an internal document that helps to detect accounting errors. If debits equal credits, it means a business is able to maintain accurate accounting books and is arithmetically correct, though errors could still exist at this stage.

Contrastingly, a balance sheet is prepared for both internal and external users like stakeholders, investors, and auditors so they can get a snapshot of the business’s financial position and net worth at a given point in time.

• Reporting level

A balance sheet is a part of the final financial statements that helps to assess the financial health of the company.. Trial balance, on the other hand, helps ensure accuracy of the ledger and sets the base for preparing financial reports, including balance sheets and income statements.

How To Generate Trial Balance And Balance Sheet Easily?

Preparing trial balances and balance sheets with spreadsheets for innumerable accounts is not feasible at all as it presents many challenges, such as lack of real time updates, increased errors, inaccurate reconciliation and more. To handle these challenges, businesses should use accounting software that will help balance your books, arrange your data in the statement format, and audit all transactions efficiently and quickly.

However, legacy accounting software comes with many challenges. They are often hard to integrate with a business’s existing ERPs or CMS, and accountants have to manually feed the transactions and then match them to ensure accuracy. More importantly, these software offer little to no customization features. This means that if there are any errors left while posting numbers from ERPs, then there is no other way to update or rectify it except for preparing the statement from scratch.

This is where accounting close software features like LiveCube come into play. It’s a no-code platform that helps you build Excel-like, easy-to-use, highly customized templates for journal entries and trial balance, where businesses can track progress and take action. Accountants can download the spreadsheet template from the close software that’s pre-configured to the existing format. They can then populate the template with the results of the work and attach it to the reconciliation task. After that, the template will automatically post the entries into the ERP.

• Capture all information required for the balance sheet and trial balance

Using the LiveCube application, accountants can create a table that captures all the information required to post the transaction into the ERP. Once set up, the table will be available across all close and reconciliation tasks. For example, if a business wants to reconcile bank entries for its customers, the summary workings for the identified items are created into a Journal Entry format using LiveCube and can be posted back into the ERP.

• Create and automate trial balance template

Businesses can automate journal entry templates with just a one-time template setup and automate the posting of journal entries back to source ERP systems. So, analysts and accountants enjoy less manual intervention by automating data preparation from LiveCube templates, and tracking all journal entries and trial balance postings from a single workspace

• Integrate with ERPs and extract data

Additionally, LiveCube integrates not only source systems like ERP but also other 3rd party systems to extract general ledgers and sub-ledger data. For instance, travel expense data can be automatically extracted from Expensify through a pre-built connection. It will also seamlessly bring in summary and transactional line item level data from general and sub-ledger systems like accounts receivable, fixed assets, and accounts payable. Businesses will be able to extract transactional and master data from logistic areas as well, like sales invoices, purchase order history, and SKU details.

• Real-time updates with customization

A robust accounting close software like HighRadius offers businesses over 100+ LiveCube templates with a configured spreadsheet interface that automatically updates computations whenever the source data changes, thereby saving time and increasing productivity. For example, posting travel expenses may involve mapping the salesperson to the right cost center and summarization of expenses by expense category.

Enhance Your Accounting Practices With HighRadius Financial Close Management Software

HighRadius offers a cloud-based Record to Report solution that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.

Our Financial Close Management Software is designed to create detailed month-end close plans with specific close tasks that can be assigned to various accounting professionals, reducing the month-end close time by 30%. The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it.

Our Account Reconciliation Software provides an out-of-the-box formula set that can configure matching rules and match line-level transactions from multiple data sources and create templates to automate various transaction processing required for month-end close. Our solution has the ability to prepare and post journal entries, which will be automatically posted into the ERP, automating 70% of your account reconciliation process.

Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ throughout the financial period so that teams can avoid the month-end rush. The AI algorithm continuously learns through a feedback loop which, in turn, reduces false anomalies. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes.

FAQs

1) What are the differences between trial balance, balance sheet and profit and loss statement?

A trial balance lists all the debit and credit balances from a business’s general ledger. A balance sheet aggregates by categories assets, liabilities, and equity and shows a company’s net worth. A profit and loss statement highlights the financial performance and lists revenues, costs, and expenses.

2) Is a trial balance the same as a balance sheet and income statement?

No. Trial balance is the first step to prepare a balance sheet and income statement and is prepared to check the accuracy of all general ledger accounts. A balance sheet shows a company’s net worth, while the income statement highlights a business’s net worth and financial performance.

3) Is the trial balance the same as the balance sheet?

No, a trial balance is not the same as the balance sheet. A trial balance is an internal statement that records the closing balances from all general ledgers. A balance sheet uses the trial balance as a source to aggregate all the ending balances at the end of the period and shows a company’s net worth.

4) How often should I review trial balance?

A business should review trial balance regularly to identify discrepancies early on. Usually, businesses must review trial balance at the end of each accounting period, that is either monthly, quarterly or annually depending on the business needs. Businesses can also review it after any vital transactions or adjustments.