Companies use accounting software that helps prepare financial statements. However, the process behind the software is similar to that used by manual accounting processes. This process begins with an accounting entry that enters the system. This entry then enters the general ledger. Within the general ledger, companies have various accounts related to different areas. Usually, these accounts fall under assets, liabilities or equity.
From the general ledger, the software calculates the closing balances for accounts. These closing balances then end up on the trial balance. From there, this information helps in the preparation of various financial statements. However, the balances on the trial balance may go through some adjustments before reaching those statements.
The primary financial statements for companies include the balance sheet and the income statement. Companies may also prepare a cash flow statement and statement of equity. However, they do not require information on the trial balance in most cases. Similarly, although the trial balance and balance sheet may sound confusing due to their names, they are different. It is crucial to understand what they are.
What is the Balance Sheet?
The balance sheet is one of the fundamental financial statements prepared by companies. This statement differs from the other statements in various regards. In essence, the balance sheet includes a list of balances. These balances fall under three components, including assets, liabilities and equity. Each of these components shows a different aspect of a company’s operations.
The balance sheet shows the snapshot of a company’s operations at a specific time. The other financial statements include periodical information. However, the balance sheet provides an overview of assets, liabilities and equity at a specified time. This statement shows a company’s financial position at the time. Therefore, it is also called the statement of financial position.
The balance sheet provides valuable insights into a company’s resources and obligations. Essentially, it shows how much a company owns and owes. Through this information, users can make crucial decisions about their relationship with the company. The balance sheet also requires information from the trial balance to present those balances.
Overall, the balance sheet is a financial statement that provides a list of balances. These balances give valuable insights into a company’s operations. More specifically, these help users understand the assets, liabilities and equity positions. The balance sheet also uses a specific format. This format comes from the accounting standards that companies follow.
What is the Trial Balance?
The trial balance is a list of balances that go into the financial statements. Due to this feature, some users may confuse it with the balance sheet. However, the trial balance is an internal document that accumulates various balances from the general ledger. This statement has a list of all accounts with the financial systems. Therefore, any head with a general ledger account will also appear on the trial balance.
The primary purpose of the trial balance is to help companies prepare their financial statements. However, it is not an external document. Instead, companies use it internally to enable the preparation. For most companies, it serves as an accumulating statement for various balances. With the trial balance, companies gather general ledger accounts into one location. They can then use the information to prepare financial statements.
However, the trial balance does not act as an accumulator of general ledger balances. It also summarizes that information into one location. Furthermore, it also acts as an assurance for companies to ensure their bookkeeping is arithmetically correct. Like the balance sheet, companies must ascertain the trial balance balances. If it does not do so, the accounting system may have issues.
Overall, the trial balance acts as a statement that accumulates various general ledger balances. It also includes information for other financial statements, particularly the income statement. All accounts reported in the trial balance end up on the primary financial statements. It is a critical part of the overall accounting process that companies perform.
Balance Sheet Vs. Trial balance: What are the differences?
The balance sheet and trial balance are two separate statements. Both of these play a vital role in a company’s accounting system. However, they are also fundamentally different from each other in various aspects. The primary differences between the balance sheet and trial balance include the following.
A trial balance is a statement that summarizes all account balances from the general ledger. On top of that, it also includes figures necessary for preparing the income statement. However, the balance sheet is an actual financial statement. It also lists various account balances. However, it only includes those assets, liabilities or equity.
The format for the trial balance usually includes three columns. It consists of the account name column with two for debit and credit. Under those two columns, it lists amounts that relate to that side. Some companies may also add other columns to it. However, the balance sheet has a specific format dictated by the accounting standards. It involves listing total assets on one side and total liabilities and equity on the other side.
Companies use the trial balance as a summary sheet for general ledgers. As mentioned, it summarizes those balances under one location. Similarly, it helps them determine whether the total debit and credit balances are equal. In contrast, the balance sheet shows the accuracy of the company’s financial operations. However, it also requires the total assets and sum of total liabilities and equity to be equal.
The balance sheet and trial balance also differ in their usage. As mentioned, the trial balance is an internal document. Therefore, stakeholders and other users cannot view it. Despite that, it does not imply it does not play a role in preparing the financial stamens. On the other hand, the balance sheet has internal and external usage. Although, the latter may be more relevant.
During the accounting process, the preparation of the trial balance occurs before the financial statements. As mentioned, companies require this statement to prepare the balance sheet. Therefore, the trial balance comes before the balance sheet. Once companies prepare it, they must work on the other financial statements. Once all those financial statements are ready, companies prepare the balance sheet.
The trial balance uses the general ledger as a source. As mentioned, it summarizes the balances from general ledger accounts. Therefore, the general ledger acts as a source for the trial balance. In contrast, the balance sheet also relies on those general ledger accounts. However, it uses the trial balance as a source. On top of that, it also requires information from other financial statements, for example, the income statement.
The trial balance has two purposes. The first involves summarizing general ledger balances. The second, in contrast, is to ensure the debits and credits are equal. Once companies meet these purposes, the trial balance is ready for further usage. In contrast, the primary purpose of the balance sheet is to provide information. More specifically, it helps users understand the financial position of a company.
Some users may confuse the balance sheet and trial balance due to their similar features. However, they are significantly different from each other. Essentially, the balance sheet is a financial statement, while the trial balance is a part of the accounting process. In addition to this, the balance sheet also differs from the trial balance in the ways listed above.