In accounting, we often come across two terms, such as trial balance and balance sheet. Both of these form an integral part of the accounting process. Let us have a look at their importance in the accounting system.
What is Trial Balance?
Trial balance is an important part of accounting as it is the first step towards the formation of a financial statement. It contains all the balances of the general ledger accounts of a company for a certain period.
A trial balance is a list which contains a total of all the debit and credit accounts for an entity for a given period which is usually a month. The trial balance item list consists of the following balance components arranged in specific columns, namely, debit and credit
Assets = Debit balance
Liabilities = Credit balance
Expenses = Debit Balance
Revenue = Credit balance
Equity = Credit balance
What is Balance Sheet?
Balance sheet is a type of financial statement that shows the financial position of a company in terms of assets, liabilities and equity at the end of an accounting period. Most of the information regarding assets, liabilities and owner’s equity items are obtained from the adjusted trial balance of the company that is prepared before the balance sheet.
The three components of a balance sheet are:
- Owner’s equity or stockholder’s equity
Balance sheet is represented as Assets = Liabilities + Net worth
The balance sheet format is as follows:
Importance of Trial Balance and Balance Sheet
Trial Balance is an internal statement that a company prepares for reporting the status of debits and credits. It helps a business to determine the arithmetical accuracy of the debits and credits as in trial balance the debit side must be equal to the credit side.
The trial balance helps in comparing past year balances which helps a business in checking the important factors like income, expenses etc and plan accordingly. It also helps a business in identifying the trend and take appropriate decisions.
Also, a trial balance is the source based on which the financial statement will be prepared.
Balance sheet is the document that a company presents to the stakeholders to inform them about the status of the company. It helps in getting a clear picture of the current financial position of the company.
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