What differences exist between balance sheet and trial balance?

May 23, 2010

1. Nature of trial balance

A trial balance is a list of all accounts of a company that shows balances in these accounts at a point in time.  The accounts come from the company’s chart of accounts and include balance sheet and income statement ones. For example, the trial balance may include accounts 1000 “Cash in Bank,” 1001 “Cash in Transit,” etc. The trial balance is typically constructed prior to the balance sheet.  The trial balance sheet shows, in total for each account, general ledger entries from all transactions that have occurred in the company over time.  Each general ledger entry consists of a debit and corresponding credit action.  The debit entries are reported in the debit column, and the credit entries are reported in the credit column. At any point in time, typically monthly, the general ledger can be reconciled to see if the debit entries match the credit entries.  This reconciliation entails adding the debit column items and checking to see if they match with the total value of the credit column. This is done to check for errors in reporting before information is transferred to the balance sheet or other financial reports.

2. Nature of balance sheet

The balance sheet is a financial report that is created from the trial balance. When preparing the balance sheet, the trial balance is used as a starting point.  All trial balance accounts are aggregated into balance sheet elements.  For example, all cash related trial balance accounts (1000 “Cash in Bank,” 1001 “Cash in Transit,” etc.) are summed up to become a balance sheet element called “Cash and Cash Equivalents.”  Therefore, a balance sheet is a trial balance with accounts aggregated at a higher level.

The balance sheet provides a snapshot of a company’s financial position on a given date. This report contains a total of all assets, liabilities and shareholders’ equity. The most important concept in the balance sheet is that the total assets should equal the total liabilities plus shareholders’ equity. On one side of the balance sheet all of the assets are listed. The other side of the balance sheet lists the liabilities and shareholders’ equity. Assets are considered to be all property or valuable rights that are owned by the company.  Assets can include items such as property, cash, and inventory. Liabilities are the financial debts and obligations owed by the company. Items in the liability section can include accounts payable and long term debt.  The shareholders’ equity is the difference between the total assets and total liabilities and represents the residual value of the company, after liabilities, to the shareholders’.  The most common items shown in the shareholder’s equity section are common stock, preferred stock, additional paid-in capital, and retained earnings.

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