Trial Balance and Balance Sheet

The balance sheet is a financial declaration that exemplifies the company’s monetary condition. After organizing trading and profit and loss financial records, it documents the business’s assets and liabilities at the termination of the accounting period.

A trial balance is a financial statement that shows the final ledger balance of all accounts in a company. The Trial Balance is created at the end of the year and is used to create financial statements such as the Profit and Loss Account and the Balance Sheet. The fundamental goal of a Trial Balance is to guarantee that the business transactions recorded in a company’s ledgers are mathematically correct.

Importance and Limitations of Trial Balance

The importance of Trial Balance is as follows:

1. When migrating data from various ledger books such as purchase books, sales books, cash books, and so on, the trial balance is used to verify the real amount entered on the right side of the current account. Aside from checking the accuracy of general ledger accounts, trial balance is also beneficial for checking the accuracy of special-purpose accounting books.
2.  At the end of each accounting year, a profit and loss account, a balance sheet, and a cash flow statement must be prepared. The trial balance already has the balances of all the ledger accounts necessary to create financial statements. As a result, it facilitates the preparation and analysis of financial accounts.
3. Trial Balance Preparation assists with peer analysis and comparing current year balances to previous year balances. This enables the company to make key decisions about revenue, expenses, and production costs, among other things. It aids in recognising business trends and taking action as necessary.

The loopholes of trial balance are as follows:

1. It does not imply that all transactions were documented.
2. It is unable to locate the missing ledger entry.
3. It is unable to defend against commission errors.

Importance and Limitations of Balance Sheet

Some advantages of using balance sheet are as follows:

1. The balance sheet depicts a company’s financial health at a specific point in time, usually the conclusion of a month or fiscal year. It can tell you whether you owe more money than you have, as well as the current value of your assets and the overall value of your company.
2. More importantly, if you are familiar with financial ratios, the balance sheet can present warning indications so that any problems can be addressed before they harm your organisation. The balance sheet is an important financial statement to check on a frequent basis because it changes with each transaction.

Some limitations of Balance Sheet are as follows:

1. The balance sheet has a key flaw in that it only accounts for bought assets. As a result, when assets are generated internally through research and development, they are not recognised at market value, but rather at a cost that is normally lower than or occasionally higher than market value. Assume the company creates a website and launches e-commerce. The value capabilities of the website have cost is usually ignored on the balance sheet.
2. To fully utilise all of the components on the balance sheet, the business balance sheet must be compared to those of competitors as well as their own balance sheet across various accounting periods. Making the comparison is thus a necessary effort in order to get the benefits of the balance sheet.
3. Because a balance sheet represents a company’s financial status as of a specific date, the management or owners want the balance sheet to be as healthy as feasible. They would simply pay off the bank obligation on the due date, reducing the amount as of that day. Businesses have the ability to manipulate cash, debtors, and creditors data in order to manipulate lenders. A high cash balance at the end of the accounting period, for example, should indicate substantial liquidity reserves. The company’s goal for cash application, on the other hand, may be different. As a result, the balance sheet data for a certain period of time can be misleading.

We have so far seen the advantages and disadvantages of both Trial Balance and Balance Sheet. We are now in a position to learn about the differences between Trial Balance and balance Sheet.

Distinguish between Trial Balance and Balance Sheet

1. Aggregation. The trial balance displays information at the account level, whereas the balance sheet aggregates many accounts (and is therefore more detailed).
2. Standards: The balance sheet is formatted according to specified accounting rules, but the trial balance has no set format.
3. Usage: The balance sheet is designed for external use, whereas the trial balance is intended for internal usage and auditing.
4. Level of reporting: The trial balance is used to generate additional reports, whereas the balance sheet is a final report.

The comparison between the two can further be summarised in the following table:

Conclusion

As in this article, we are well equipped with the knowledge that can ensure the difference between a Trial balance and a Balance Sheet. Both Trial Balance and Balance Sheet are tools of accounting and each are well accompanied with their importance and short-comings. The article has efficiently defined and explained the conceptual differences between trial balance and balance sheet.