What is the difference between a trial balance and a balance sheet, and how do they relate to each other? Let’s cover trial balance versus balance sheet by asking ourselves five questions:
Which one is a financial statement?
Which one has more accounts listed?
Which one is used earlier in the accounting process?
Which one is used only for internal purposes?
Which one is best viewed on an aggregated level?

⏱️TIMESTAMPS⏱️
0:00 Introduction
0:08 Trial balance vs balance sheet questions
0:35 Trial balance example
0:54 Trial balance definition
1:30 From trial balance to balance sheet
3:35 Balance sheet example
4:31 Balance sheet definition
4:41 Trial balance vs balance sheet comparison

Here’s an example of a trial balance, which is a very useful accounting tool that has been in use for centuries, and is still used today! A trial balance allows you to check for mathematical errors, monitor the accuracy of transactions, and verify account balances versus expectations. A #trialbalance is a listing of all ledger accounts along with their respective debit or credit balances for the period. At various stages in the accounting process, you can run a trial balance whenever you’d like to check on the work-in-progress balances, and decide what action is needed next. After making adjusting entries, you simply run another trial balance to review updated balances. A trial balance is an internal accounting report, refresh it as many times as you find useful.

From the final trial balance, you can construct the financial statements, including the balance sheet. These financial statements can be used for internal as well as external purposes. A balance sheet, also called statement of financial position, is an overview of what a company owns and what a company owes at a point in time. What we own (assets) on the left. What we owe (liabilities and equity) on the right. Only the asset, liability and equity accounts from the trial balance go directly onto the balance sheet.

Assets tend to be listed from most liquid to least liquid. The most liquid asset is cash of $68000. In this example, accrued revenue of $1700 and prepaid expense of $250 are next. Then we get to fixed assets. For balance sheet purposes, I would combine fixed assets of $1500 debit with accumulated depreciation of $300 credit to net fixed assets of $1200. The sum of the asset accounts is $71,150.
On the other side of the balance sheet, we start with liabilities which we list from due first to due last. Deferred revenue of $3000, and accrued expenses of $2000. What about equity? Here we have to take into account that at the end of the accounting period, the results of the income statement during the accounting period get added to the balance sheet position at the end of the accounting period. We therefore take the revenue minus the expense accounts into equity, bringing equity from $20000 to $66150. Total liabilities and equity (what we owe) is now equal to total assets (what we own).

Let’s look more closely at this #balancesheet example. We can group certain accounts into categories. Cash, accrued revenue, and prepaid expenses for example are all current assets: cash and other assets that are expected to be converted to cash within a year. Fixed assets are an example of non-current assets: assets that are not expected to be converted to cash within a year. Deferred revenue and accrued expenses are examples of current liabilities: amounts due to be settled with creditors within twelve months. Just like there are current and non-current assets, there are also current and non-current liabilities, however this example does not have non-current liabilities (such as long term debt). Equity is the book value of the shareholder capital.
What is a balance sheet? A financial statement showing an overview of what a company owns and what a company owes at a point in time.

Trial balance versus balance sheet.
Which one is a financial statement? The balance sheet.
Which one has more accounts listed? The trial balance.
Which one is used earlier in the accounting process? The trial balance.
Which one is used only for internal purposes? The trial balance.
Which one is best viewed on an aggregated level? The balance sheet.

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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