Trial Balance vs. Balance Sheet: Key Differences

As a founder, it's vital to keep a close eye on your business's cash flow — monitoring the money coming in and going out and understanding how much cash runway you have. 

In this article, we compare a trial balance vs. a balance sheet and help you understand their purpose, composition, and structure, and how to utilize them effectively.

What is trial balance?

A trial balance is a financial report that lists the ending balance of each account in your company's general ledger at a specific point in an accounting period. 

In visual terms, you can think of it as a balancing scale. On one side, you have debits; on the other, you have credits. 

By ensuring the total debits equal the total credits, the trial balance helps to identify and correct any potential bookkeeping errors in balancing accounts. 

It's usually used as an internal document that provides a consolidated view of your company's financial transactions for a specific period.

What is a balance sheet?

A balance sheet, also known as a statement of financial position, is a critical financial statement that provides an overview of your company's financial health for a specific reporting period. 

You can think of it as a financial photograph that captures the following financial information:

• Assets: Everything of value that your company owns — equipment, inventory, cash, buildings, or intellectual property like patents and trademarks
• Liabilities: Anything your company owes to others — accounts payable, wages payable, loans, etc. You can think of total liabilities as all of your company's outstanding debts.
• Shareholder Equity: This represents the amount of money shareholders have invested in your company and any retained earnings, like dividends, which you have not yet disbursed to shareholders.

The key differences between trial balance vs. balance sheet

Let's take a closer look at the differences between the two.

Purpose and function

The trial balance report and balance sheet play critical but distinct roles in financial reporting.

One of the important purposes of the trial balance is to act as an internal control mechanism and ensure the accuracy of the double-entry bookkeeping system. 

Verifying the total debits match the total credits at various points in the accounting cycle helps to identify different types of errors like typos, incorrect or missing journal entries, and other inconsistencies.

Typically, accountants generate the trial balance at three points:

• Unadjusted trial balance at the start of the accounting cycle
• Adjusted trial balance after adjusting journal entries
• Post closing trial balance at the end of the accounting cycle

This ensures the accuracy of subsequent financial statements like the income statement and balance sheet, which are prepared using the information in the trial balance.

Unlike the trial balance, which is an internal report, the balance sheet also serves as an external communication tool. It presents your company's financial standing in a clear and concise format, categorized into assets, liabilities, and shareholders' equity. 

This facilitates internal decision-makers and external stakeholders in understanding how the company is financed, what it owns, and how much it owes. It gives an overall picture of your company's financial health, liquidity, and solvency.

Composition and structure

Each line in the trial balance lists the name of a general ledger account, along with the closing entries and ending account balance. This closing balance is categorized as credit or debit, depending on the account type. 

For example, since accounts payable (vendor payment, salaries) are a liability, they're listed as credits. On the other hand, accounts receivable (customer invoices) are listed as a debit since they're an asset.

The trial balance sheet usually has three columns:

• Account name: This column lists the names of all general ledger accounts.
• Debit: The debit column displays the debit balance of all accounts included in the trial balance.
• Credit: The credit column displays the credit balance of all accounts included in the trial balance.

For a balanced trial balance, the total debits must equal the total credits. This signifies that, based on the double-entry accounting system, every debit has an equal credit, and vice versa. 

Any trial balance errors in these ledgers indicate potential discrepancies in the financial records.

In contrast, the balance sheet has two sections:

• Assets: These are usually recorded on the left side and categorized by their liquidity (current vs. long-term).
• Liabilities & Equity: These are recorded on the right side and include current liabilities, long-term liabilities, and shareholder equity.

Each balance sheet account is organized using the accounting equation assets = liabilities + equity, ensuring the two columns always have the same total value.

Timing and frequency

Preparing trial balances is more frequent since it may happen several times during a single accounting period, depending on your company's accounting cycles, procedures, and needs. 

This allows your accounting team to identify and correct bookkeeping errors in final accounts before closing the books. Balance sheets are generated less often, usually once per accounting period.

Impact on financial analysis

The trial balance software is the starting point for accounting basics like creating financial statements, including the balance sheet and income statement. 

Highlighting any errors in the accounting process prevents less than accurate financial statement data from being used in further financial analysis. 

In contrast, the balance sheet forms the basis for calculating various types of financial ratios, like liquidity, solvency, and profitability.  

Leverage both for comprehensive financial understanding

The trial balance and balance sheet work together to provide a robust foundation for financial analysis and reporting. 

The trial balance ensures the accuracy of underlying financial transaction data, while the balance sheet translates that data into a meaningful picture of the company's financial standing.

Knowing how to read and interpret the balance sheet and trial balance provides you with critical data to make informed business decisions. Ready to get started with these key financial documents? 

Learn how you leverage the power of AI to create and generate these reports without hiring expensive financial professionals.