Bookkeeping in Business English trial balance, transactions, the balance sheet, cash flow

Bookkeeping

For management of any company to be efficient, extensive and accurate information concerning receipts and payments, assets and liabilities, depreciation of assets and other data about company status are required. Such information being obtained mainly from different records, additional funds and time should be invested in bookkeeping and accounting system.

In general, accounting and bookkeeping mean identifying, measuring, recording economic information about any business, bookkeeping being considered the preliminary stage and part of the larger field of accounting.

The task of a bookkeeper is to ensure the record-keeping aspect of accounting and therefore to provide the data to which accounting principles are applied in the preparation of financial statements. Bookkeeping provides the basic accounting data by systematical recording of such day-to-day financial information as income from the sale of products or services, expenses of business operations such as the cost of the goods sold and overhead expenses 1 such as a rent, wages, salaries.

Accounting principles determine which financial events and transactions should be recorded in the bookkeeper’s books. The analysis and interpretation of these records is the primary function of accounting. The various financial statements produced by accountants then provide managers with the basis for future financial planning and control, and provide other interested parties (investors, the government) with useful information about the company.

d to be a seven-step cycle. The first three steps fall under the bookkeeping function, such as: 1) the systematic recording of financial transactions; 2) the transferring of the amounts from various journals to general ledger (also called «posting step»); 3) the drawing up of the trial balance.

Record keeping of companies is based on a double-entry system, due to which each transaction is recorded on the basis of its dual impact on the company’s financial position. To make a complete bookkeeping record of every transaction in a journal, one should consider interrelated aspects of every transaction, and entries must be made in different accounts to keep the ins (receipts) and outs (payments) balanced.

A typical account is known to have two sides: the items on the left side are called debits, while the items on the right side are credits.

Thus, double-entry bookkeeping doesn’t mean that the same transaction is entered twice, it means that the same amount of money is always debited to one account and credited to another account, each record having its own effect on the whole financial structure of the company. Certain accounts are increased with debits and decreased with credits, while other accounts are increased with credits and decreased with debits.

In the second step in the accounting cycle, the amounts from the various journals are usually monthly transferred to the company’s general ledger − a procedure called posting. Posting data to the ledgers is followed by listing the balances of all the accounts and calculating whether the sum of all the debit balances agrees with the sum of all the credit balances. This procedure known as the drawing up of a trial balance and those that follow it usually take place at the end of the fiscal year. By making a trial balance, the record-keeping accuracy can be checked. The trial balance having been successfully prepared, the bookkeeping portion of the accounting cycle is completed.

The double-entry system of bookkeeping enables every company to determine at any time the value of each item that is owned, how much of this value belongs to creditors, the total profit and how much belongs to the business clear of debt. Thus, one advantage of the double-entry system is that its information is complete enough to be used as the basis for making business decisions. Another advantage is that errors are readily detected, since the system is based on equations that must always be in balance.

1. overhead expenses — накладные расходы

2. dual impact – двойное воздействие

2. Read the text again and answer the following questions.

1) What role does bookkeeping play in the accounting cycle? 2) What kind of data is collected by a bookkeeper? 3) Who is interested in obtaining accurate accounting information? 4) What is the modern concept of the accounting system?

5) What tasks should a bookkeeper fulfil at the first three steps of the accounting cycle? 6) What does double-entry bookkeeping mean? 7) What data are recorded in the company’s general ledger? 8) When is the bookkeeping cycle considered to be completed? 9) What are the advantages of the double-entry system?

1. Fill in the missing words and word combinations from the list given. One word is used twice:

How to Prepare a Balance Sheet (Statement of Financial Position)

March 12, 2020 By Vic 1 Comment

The balance sheet or the statement of financial position is one of the major components of financial statements, which include the income statement, statement of cash flow, statement of changes in equity and the notes to financial statements. The balance sheet gives readers of financial statements the snapshot of an entity’s financial condition. It presents the company’s assets, liabilities and equity, which show the basic accounting equation (assets = liabilities + equity), where total assets must always be balanced with the sum of the total liabilities and total equity. If you own a business and you have an accountant, the accountant will be the one who will prepare your balance sheet. But small business owners or even professionals and freelancers who just want to make a simple balance sheet can try to prepare this statement on their own.

Steps to be made before the preparation of balance sheet

In the accounting cycle, the balance sheet and other financial statements are prepared after the adjusted trial balance is done. Preparing the balance sheet without doing the previous steps of the accounting cycle will give the preparer troubles in coming up a fair balance sheet statement. Thus, if you want to learn how to prepare a balance sheet or statement of financial position, you should first learn the following steps of the accounting cycle.

You may read and study the above articles up to the preparation of the adjusted trial balance. In those articles, we have used the same examples of transactions and events, from recording the journal entries up to the adjustment of the trial balance. We will now then use the account titles and balances in the adjusted trial balance in our preparation of the balance sheet. Here’s the adjusted trial balance we have prepared from our previous article.

How to prepare a balance sheet from the adjusted trial balance

Once the trial balance is adjusted and updated to correct errors and other adjustments, we can now prepare the balance sheet and income statement. The following are the simple steps you need to know in preparing a simple balance sheet:

1. Start with the heading. The heading includes the name of entity (individual or company), name of the statement (balance sheet), and the reporting period (ex. as of December 31, 2020). Some complex forms of businesses may include a more detailed heading, such as when reporting a consolidated balance sheet and or when presenting comparative years. Below is an example of a simple heading in the balance sheet we have prepared from our sample adjusted trial balance. You may also indicate the local currency (e.g., Amounts in Philippine Pesos) used in your balance sheet statement.

2. Present your assets. Classify you assets into current and noncurrent assets. Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the entity’s normal operating cycle; or assets held for trading within the next 12 months. The rest are considered noncurrent assets. From our adjusted trial balance, our current assets include cash, accounts receivables and prepaid expenses. Take note that we have grouped the prepaid rent (P15,000), prepaid insurance (P11,000) and unused computer supplies (P45,000) into one account, that is, prepaid expenses totaling P 71,000. On the other hand, our noncurrent assets only consist of computer equipment and its accumulated depreciation. This results to a net carrying amount of P98,333 for the computer equipment.

3. Present your liabilities. After we’re done with the total assets, next are the liabilities. Liabilities should also be classified as current and noncurrent. But in our example, we only have current liabilities. Our current liabilities include accrued expenses, loans, and income tax payable. After presenting our total assets and liabilities, our balance sheet already looks like this.

4. Add the owner’s equity. The balance sheet is an equation of “Assets = liabilities + equity”. Thus, we need to add the owner’s equity in the “liabilities and equity” section of our balance sheet. The owner’s equity presented may only show the ending balance, that is, the ending balance amount shown in the statement of changes in owner’s equity. This amount is already the result after adjusting the investments, withdrawals, net income (loss) for the year, and other adjustments from the beginning balance of the owner’s equity. After, presenting the owner’s equity, our balance sheet will already look like this.

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Note that the “total assets” and the “total liabilities and owner’s equity” must be balanced. Also remember that this is only an example of a balance sheet for a single proprietorship business. Other forms of businesses, such as partnership and corporation, may have different presentation in the equity section of the balance sheet. Furthermore, the term balance sheet is amended to statement of financial position by IAS 1 (International Accounting Standard) in 2007. Hence, if your country is covered by this standard, the statement of financial position is a more appropriate term than the balance sheet. But for the purpose of this example, we have used the term balance sheet, since it is the most common and most searched term on the Internet. Also remember that in a complete set of financial statements, accounts in the balance sheet are also cross-referenced to the accompanying notes to financial statements. This article is only a quick guide to preparing a simple balance sheet for an individual or a single proprietorship business.

Victorino Abrugar is an entrepreneur and founder of Optixor, Inc., a small startup digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

Bookkeeping as Part of Accounting Cycle

Active vocabulary

Bookkeeping Бухгалтерия; бухгалтерский учет
Double-entry bookkeeping Система бухгалтерского учета с двойной за­писью
Bookkeeper Бухгалтер, счетовод
Accurate Точный, правиль­ный; тщательный
Accurately Точно, правильно; тщательно; безошибочно
Receipts Денежные поступ­ления, выручка; приход; доходы
Data Данные
Datum Данная величина
Record Запись; регистрация; учетные документы; документа­ция; записывать; реги­стрировать
Record-keeping Ведение учета; учет
Preliminary Предваритель­ный
Financial statements Финансовая документация
Monthly statement Ежемесячный бюллетень
Journal Бухгалтерский жур­нал, регистр; ведомость
General journal Главный журнал учета
Ledger Бухгалтерская книга, бухгалтерский регистр, гроссбух
General ledger Общая бухгалтер­ская книга
Balance the ledgers Сбалансиро­вать бухгалтерские книги
Posting Разноска по счетам, перенос в бухгалтерскую книгу: проводка
Post Делать проводку; разносить сче­та; заносить в бухгалтерскую книгу
Ledger posting Запись в главную бухгалтерскую книгу
To post the journal into the ledger Переносить журнальные записи в главную книгу
Draw up a balance Подводить, составлять баланс
Trial balance Пробный, предварительный бухгалтерский баланс
To bring accounts to a balance Составлять сводный баланс
Favourable balance Активный баланс; положительный баланс
Unfavourable balance Пассивный баланс; отрицательный баланс
Cash balance Кассовая наличность
Balance of an account Остаток счета
Balances with foreign banks Остатки на счетах в заграничных банках
Balance in hand Денежная наличность; наличность кассы
Balance of payments Платежный баланс
Balance of payment deficit Дефицит платежного баланса
Debit account Запись в левой части счета, показывающая задолженность организации
Debit of an account Дебет счета; списание средств со счета
Debit balance Дебетовое сальдо; дебетовый баланс, положительное сальдо
Credit account Запись в левой части счета, показывающая приход актива
Credit balance Кредитовое сальдо; кредитовый баланс, отрицательное сальдо
List Список; составлять список
Accuracy Точность, правильность; тщательность
Error Ошибка, погрешность

For management of any company to be efficient, extensive and accurate information concerning receipts and payments, assets and liabilities, depre­ciation of assets and other data about company status are required. Such information being obtained mainly from different records, additional funds and time should be invested in bookkeeping and accounting system.

In general, accounting and bookkeeping mean identifying, measuring, recording economic information about any business, bookkeeping being con­sidered the preliminary stage and part of the larger field of accounting.

The task of a bookkeeper is to ensure the record-keeping of ac­counting and therefore to provide the data to which accounting principles are applied in the preparation of financial statements. Bookkeeping provides the basic accounting data by systematical recording such day-to-day financial information as income from the sale of products or services, expenses of busi­ness operations such as the cost of the goods sold and overhead expenses (накладные расходы) such as a rent, wages, salaries.

Accounting principles determine which financial events and transactions should be recorded in the bookkeeper’s books. The analysis and interpretation of these records is the primary function of accounting. The various financial statements produced by accountants then provide managers with the basis for future financial planning and control, and provide other interested parties (in­vestors, the government) with useful information about the company.

Modern accounting system is considered to be a seven-step cycle. The first three steps fall under the bookkeeping function, such as: 1) the systemat­ic recording of financial transactions; 2) the transferring of the amounts from various journals to general ledger (also called «posting step»); 3) the drawing up of the trial balance.

Record keeping of companies is based on a double-entry system, due to which each transaction is recorded on the basis of its dual impact on the company’s financial position. To make a complete bookkeeping record of every transaction in a journal, one should consider interrelated aspects of every transaction, and entries must be made in different accounts to keep the ins (receipts) and outs (payments) balanced.

A typical account is known to have two sides: the items on the left side are called debits, while the items on the right side are credits.

Thus, double-entry bookkeeping doesn’t mean that the same transaction is entered twice, it means that the same amount of money is always debited to one account and credited to another account, each record having its own effect on the whole financial structure of the company. Certain accounts are increased with debits and decreased with credits, while other accounts are increased with credits and decreased with debits.

In the second step in the accounting cycle, the amounts from the various journals are usually monthly transferred to the company’s general ledger — a procedure called posting. Posting data to the ledgers is followed by listing the balances of all the accounts and calculating whether the sum of all the debit balances agrees with the sum of all the credit balances. This procedure known as the drawing up of a trial balance and those that follow it usually take place at the end of the fiscal year. By making a trial balance, the record-keeping accuracy can be checked. The trial balance having been successfully prepared, the bookkeeping portion of the accounting cycle is completed.

The double-entry system of bookkeeping enables every company to deter­mine at any time the value of each item that is owned, how much of this value belongs to creditors, the total

profit and how much belongs to the business clear of debt. Thus, one advantage of the double-entry system is that its infor­mation is complete enough to be used as the basis for

making business deci­sions. Another advantage is that errors are readily detected, since the system is based on equations that must always be in balance.

Questions to the text:

  1. What kind of information is of great importance for proper company management?
  2. What role does bookkeeping play in the accounting cycle?
  3. What kind of data is collected by a bookkeeper?
  4. What is the difference between bookkeeping and accounting?
  5. Who is interested in obtaining accurate accounting information?
  6. What is the modern concept of accounting system?
  7. What tasks should a bookkeeper solve at the first three steps of the accounting cycle?
  8. What does double-entry bookkeeping mean?
  9. What data are recorded in the company’s general ledger?
  10. When is the bookkeeping cycle considered to be completed?
  11. What are the advantages of the double-entry system?

Accounting Information

Active vocabulary

Access Доступ, подход
Evaluate Оценивать, устанавливать стоимость; определять качество
Financial performance Финансовая деятельность
Previous Предыдущий
Financial accounting Финансовая отчетность
Managerial accounting Управленческая отчетность; учет
Deal with (dealt) Иметь дело с…; рассматривать
Deal in Торговать
Pricing Калькуляция цен; ценообразование; установление цен;
Capital budgeting Составление сметы капиталовложений и их окупаемости; расчет рентабельности капиталовложений
Spread (spread) Распространять; распределять
Set Ряд; набор; комплект
Financial statement Финансовый отчет
Statement of cash flows Отчет о движении денежных потоков
Income statement Отчет о доходах
Statement of retained earnings Отчет о нераспределенной (реинвестированной) прибыли
Annual report Ежегодный отчет
Annually Ежегодно
Cash flow Поток наличности; движение денежной наличности, движение ликвидности
Inflow cash Приток наличности
Outflow cash Отток наличности
Inflow of assets Приток активов
Outflow of assets Отток активов
Relating to (smth) Относительно, касательно; относящийся к …
Source Источник
Reliable source of information Надежный источник сведений
Generate Производить; образовывать
Disclose Раскрывать; показывать
Disclosure Раскрытие; сообщение
Summarize Суммировать; резюмировать
Net loss Чистый убыток
Render Отдавать, платить
Render a service Оказывать услугу
Render an account for payment Предоставлять счет к оплате
Withdrawal Отзыв; изъятие; отмена; аннулирование; отказ; снятие со счета; изъятие

Accounting provides informational access to a company’s financial condi­tion for three broad interest groups. First, it gives the company’s management the information to evaluate financial performance over a previous period of time, and to make decisions regarding the future. Second, it informs the general pub­lic, and in particular those who are interested in buying its stock, about the fi­nancial position of the company. Third, accounting provides reports for the tax and regulatory departments (отделы по налогообложению и регулированию деятельностью компании) of the government. In general, accounting informa­tion can be classified into two main categories: financial accounting (or public information) and managerial accounting (or private information).

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Managerial accounting deals with cost and profit relationships, efficiency and productivity, planning and control, pricing decisions, capital budgeting, etc. Not being generally spread outside the company, this information pro­vides a wide variety of specialized reports for division managers, department heads, project directors.

A standard set of financial statements is expected to be prepared regularly by financial accounting and published in an annual report at the end of the fiscal year. Being prepared in accordance with generally accepted accounting principles, these statements include the following items: 1) the balance sheet, 2) the statement of cash flows, 3) the income statement, 4) the statement of retained earnings.

Information relating to the financial position of a company, mainly about assets and liabilities, is presented in a balance sheet. The statement of cash flows shows the changes in the company’s financial position and provides information which is not available in either an income statement or a balance sheet. Thus, the statement of cash flows represents the sources and the uses of the company’s funds for operating activities (управленческая деятельность), applications of working capital and data about additional financial support. Provided the company couldn’t generate sufficient cash to finance its activities, it would be necessary to bor­row money and it should be indicated in the statement.

Another financial statement disclosing the results of the company’s activ­ity is known as the income and expense statement. Prepared for a defined time interval, this statement summarizes the company’s revenues, expenses, gains and losses and shows whether a company has made a profit within the period. Income is considered to be the difference between revenues and expenses. If the total expenses exceeded the total revenues during the period, the difference would be the net loss of the company. Revenues are transactions that represent the inflow of assets as a result of operations — that is, the assets received from selling goods and rendering services. Expenses are transactions involving the outflow of assets in order to generate revenue, such as wages, salaries, rent, interest and taxes. In addition to disclosing revenues and expenses, the income statement also lists gains and losses from other kinds of transactions such as the sale of plant assets or the payments of long-term liabilities.

The income statement excludes the amount of assets withdrawn by the owners, in a corporation such withdrawal of assets being called dividends. The separate statement of retained earnings and stockholder’s equity shows inves­tors what has happened to their ownership in the company, how earnings and new stock issuance have increased its value, and what dividends were paid.

Each of these reports contains figures for previous years and for the cur­rent period, providing a way of comparing present and past company perfor­mance. Being prepared for the use of management, the financial statements contain neither debit nor credit columns. These statements are accompanied by additional data about the particular accounting method used, as well as explanations about the most important events within the previous year.

  1. Questions to the text:
  2. Who is interested in accounting information?
  3. What are the main differences between financial and managerial accounting?
  4. What financial statements are included in an annual report and when are they published?
  5. What information can stockholders get from the balance sheet?
  6. Why is it important to prepare the statement of a company’s cash flows?
  7. What kind of information is represented in the income statement?
  8. How can revenues and expenses be defined?
  9. What statement shows the amount of a stockholder’s dividends?
  10. Why is it necessary to prepare additional reports?
  11. What statement contains debit and credit columns?

Bookkeeping basics for your small business

Balanced books may not be sexy, but they provide small business owners with the grounding they need to make smart forecasting decisions about expanding their business, making large purchases, or hiring new employees. While the language of accounting professionals can be intimidating — especially if you’re the type of person whose financial record keeping consists of handing a box of receipts to your tax preparer once a year — don’t despair.

What might seem like an overwhelming task really isn’t so bad if you break it down into a few simple steps. Here, we’ll outline those steps and explain what you need to know to get started so that you can get on with the business of, well, your business.

Accounting basics

Before you get started balancing your books, you first need to decide what type of accounting system you’re going to use: cash accounting or accrual accounting. The type of system you decide on will determine the financial statements and tools you need to manage your small business.

A cash accounting system tracks cash flow as it enters and leaves your business in real time. Under this method, accounts receivable and accounts payable aren’t recorded because they represent future transactions. With cash accounting, financial professionals will use a cash flow statement to record the financial health of your business over a certain period of time — whether a quarter or a year.

If your company uses accrual accounting instead of a cash flow statement, you will use a profit and loss statement (P&L) — also known as an income statement — to track your small business’s financial health. This document tracks things like a company’s revenue, expenditures, cost of goods sold (COGS), gross margin, and profit.

A P&L statement also lists all the accounts payable and accounts receivable for your business. As a result, it gives you the opportunity to review your company’s net income, which is essential for making sound business decisions.

Whether you use cash accounting or accrual accounting, there is one financial document every small business needs to succeed: a balance sheet. While a cash flow statement examines the flow of cash in and out of your business, and a P&L statement documents sales and expenses during a specific time, the balance sheet provides you with your company’s net worth.

What’s on a balance sheet

How do you arrive at this magical net worth calculation? Well, at the most basic level, you only need to understand three words: assets, liabilities, and equity. Throw in some simple addition and subtraction, and you’ve balanced your books. But before we get into the math, let’s define the variables.

Assets

Your company’s assets are what it actually owns and are usually broken down into two categories: current assets and fixed assets. Your current assets include things like cash, accounts receivable, inventory, prepaid expenses, and notes receivable. Fixed assets, on the other hand, include things that are less liquid, such as vehicles, furnishings, buildings, and land. When you add the cash value of the two together, you arrive at your total assets.

Liabilities

Liabilities, put simply, are your company’s debts. There are two types of liability: current and long-term. Current liabilities are debts that are due to be paid within one year. These might include balances on business credit cards, wages payable and sales tax due at the end of your defined accounting period. Meanwhile, long-term liabilities are debts that won’t come due for more than 12 months, which might include notes payable and mortgage payments on any company-owned real estate. When you add the two together, you get your total liabilities.

Equity

Finally, your equity — also known as capital or net worth — is what your balance sheet will ultimately track. This number is crucial to your business, as it shows how much capital actually belongs to your business. To balance your books at the end of the month, you only need this simple equation:

Equity = Total Assets – Total Liabilities

If your assets are greater than your liabilities, your business is financially stable.

How to create a balance sheet

Now that you know what should be on your balance sheet, how do you actually create one?

Well, your first task is to choose your accounting period. Most businesses balance their books for each calendar month or each quarter. When you are new to the process, balancing your books each month will make the task more manageable.

If you use a cash accounting system, as many small-business owners do, and you want to start at the most basic level, you can simply write two columns of numbers on a piece of paper: assets on one side and liabilities on the other. Total each column, subtract liabilities from assets and the resulting number should equal your business equity.

Accounting and bookkeeping software like QuickBooks can simplify your bookkeeping, since most banks will allow you to download account information directly into the program. After you load the data, your only task is to review the entries and make sure each one is tagged with the correct category. Keeping a separate business bank account makes this process easy and efficient.

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How to balance your books

When you subtract liabilities from assets, the resulting number may not initially equal the equity you have in your business. In fact, it could be radically different. This might seem like a good time to throw in the towel. But don’t give up yet.

You are at the stage of balancing your books that accountants call creating a trial balance. This shows you whether there are any mistakes in your record keeping so you can rectify them, which is much easier to do at the end of the month or the quarter than the end of the year. Even seasoned professionals expect to make corrections at this stage.

To uncover errors, first check whether you forgot to record an entry in either column or listed the same entry twice. If not, try looking for a couple of common accounting errors. If the discrepancy is divisible by nine, it could mean you have transposed two digits. When two numbers are transposed (for example 850 instead of 580), the difference is always divisible by nine. If the discrepancy is a multiple of 10 (100, 1,000, etc.) there might be an addition or subtraction mistake in one of your columns.

While it may be tedious to rectify errors made while recording financial transactions, it is well worth the effort. Once you’ve corrected the errors in your books and gotten them to balance, you are truly in charge of your business — and ready to enjoy the benefits.

Why you need to balance your books

There are many benefits to keeping your books balanced. When you maintain an accurate bookkeeping system, you’re able to quickly understand the financial health of your business.

If your business is thriving, that means the sum of its assets is greater than the sum of its liabilities, which creates value in your company’s equity — or stock — and could open up new opportunities for financing. If your balance sheet shows your business’s net worth has consistently grown over time, you’re more likely to qualify for a small business loan to finance future growth. Alternatively, private investors may take an interest and buy your stock.

But there are other benefits to implementing an accurate bookkeeping system, such as knowing whether you have the opportunity for growth. Let’s say Maggie owns a small pet-sitting company and is looking to buy a larger piece of property in order to expand her business. Using her balance sheets from past quarters, she can compare numbers from the first and third quarters of the year, and determine if she has the capital available — or equity — to make a down payment on a piece of real estate.

Also, once you start balancing your books on a regular basis, you can start to see trends. In Maggie’s case, she can also see if there are fluctuations in her business — perhaps she tends to get more business in July and August as dog-owners take vacations in the summer months. That way, if she experiences a slight decrease in demand for her services in May and June, she knows her business is still on track for annual growth.

Stay balanced and poised for growth

Whether you choose to balance your books using accounting software, small business bookkeeping services, or a combination of both, understanding how the process works is a critical skill. After all, smart entrepreneurs know that even if accounting isn’t in their job description, ensuring healthy financial management of their business is crucial for a profitable bottom line.

Difference Between Trial Balance and Balance Sheet

Last updated on July 26, 2020 by Surbhi S

Trial Balance is a part of the accounting process, which is a schedule of debit and credit balances taken from all the ledger accounts. As every transaction affect two sides, i.e. every debit has a corresponding credit and the reverse is also true. The total of debit and credit balances are equal in the trial balance. In contrast, the Balance Sheet is the statement that exhibits the company’s financial position, by summarizing the assets, liabilities, and capital on a particular date.

In general, the trial balance is prepared at the end of the month or at the end of the accounting period, i.e. it can be prepared as per the requirement of the entity. On the other hand, balance sheet is prepared only at the end of the accounting period. So, here in this article, we are going to talk about the differences between trial balance and balance sheet, take a read.

Content: Trial Balance Vs Balance Sheet

Comparison Chart

Basis for Comparison Trial Balance Balance Sheet
Meaning Trial Balance is the list of all balances of General Ledger Account. The Balance sheet is the statement which shows the assets, equity and liabilities of the company.
Division Debit and Credit columns Assets and equity & liabilities heads
Stock Opening stock is considered. Closing stock is considered.
Part of Financial Statement No Yes
Objective To check the arithmetical accuracy in recording and posting. To ascertain the financial position of the company on a particular date.
Balances Personal, real and nominal account are shown. Personal and real account are shown.
Preparation At the end of each month, quarter, half year or financial year. At the end of the financial year.
Use Internal Use External Use

Definition of Trial Balance

Trial Balance is a statement which lists all the balances of the Real, Personal and Nominal Account irrespective of Capital or Revenue account. It contains two columns debit and credit. If the transactions are recorded properly by giving dual sided effect and then posted systematically, then the total of both the columns would be identical.

But if the total of both the columns is distinct then the chances of errors in the recording and posting are there. However, some errors are not revealed through trial balance they are compensating errors, error of omission, error of commission, error of principle and others.

Definition of Balance Sheet

A Balance Sheet is a statement which represents the assets, liabilities and shareholder’s equity of the company is known as Balance Sheet. This statement contains two major heads in which it is classified: One is assets, which is divided into Current and Non – Current Assets. Current Assets are those assets which are readily converted into cash while the Non – Current Assets are those assets with the help of which the company runs the business.

Another part is Equity and Liabilities, where Equity contains the amount invested by the Equity Shareholders and Reserves & Surplus. Liabilities are divided into two sections Current and Non – Current Liabilities. Current Liabilities are the debt, which is to be paid off within one year while the Non – Current Liabilities means the debt, the repayment of which can be done after a certain time.

Key Differences Between Trial Balance and Balance Sheet

  1. Statement of debit and credit balances were taken from general ledger is known as Trial Balance. Statement of assets and equity & liabilities is known as Balance Sheet.
  2. Trial Balance does not include closing stock while the Balance Sheet does not include opening stock.
  3. Trial Balance checks the arithmetical accuracy in the recording and posting while balance sheet is prepared to determine the financial position of the company on a specific date
  4. Trial Balance is prepared after posting into ledger whereas Balance Sheet is prepared after the preparation of Trading and Profit & Loss Account.
  5. The Balance Sheet is the part of the Financial Statement while Trial Balance is not a part of the Financial Statement.
  6. Balances of all personal, real and nominal account are shown in the trial balance. On the contrary, Balance sheet shows the balances of personal and real account only.
  7. The trial balance is prepared at the end of each month, quarter, half year or the financial year. Conversely, the balance sheet is prepared at the end of each month.
  8. The trial balance is prepared for internal use only, however, the balance sheet is prepared for both internal and external use, i.e. to inform outside parties about the financial condition of the entity.

Similarities

  • Both are Statement.
  • The heads of the two needs to be identical.
  • Consideration of Real, Personal and Nominal Account.

Conclusion

There are many differences between the two statements. The Trial Balance and Balance Sheet are very dissimilar from each other. The preparation of Trial Balance is not compulsory at all, but the preparation of Balance Sheet is obligatory for every company. The Trial Balance is not read by the users of the financial statement or stakeholders, but Balance sheet is used by them.

Trial Balance can be prepared as per requirement of the organization while the Balance Sheet is prepared at a particular date which is usually at the end of the accounting year.

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