In this short video you’ll learn the difference between the
trial balance and the balance sheet in accounting.
[Music]
Hey there I'm James and
welcome back to Accounting Stuff. Recently I made a video covering
the balance sheet where I mentioned this…
The trial balance is not the same thing as the balance sheet.
If you'd like to see me make a video explaining the differences
let me know in the comments. And you guys got back to me
so thank you and here we are the trial balance versus the balance sheet.
Both of these reports have balance in their names which makes them
easy to get mixed up. More on that soon
along with a knowledge bomb that I’d like to share with you
but first I want to explain how the trial balance and the balance sheet
are actually very different from one another
but also very similar at the same time.
Hmm cryptic… The trial balance is an internal
accounting report showing the closing balances of all
general ledger accounts at a single point in time.
It looks like this. We have three columns
Accounts Debits and Credits.
The accounts column contains a complete list of all of the
general ledger accounts in a business and to the right of it we have the
total debits or total credits in each account.
The trial balance shows us the closing balances of all of these accounts
at a single point in time so we need to make that clear in the title.
I'm going to use ‘Old Faithful’ the window cleaning example
that we've covered a few times before. So we'll run through our trial balance
to September 30th and here are our closing numbers.
At the bottom of the trial balance we normally take the totals for both
the debit and credit columns. This is a check to ensure that
our books are in balance because in double-entry accounting
debits and credits must match each other exactly at all times.
Back when accounting was done manually the trial balance was used to check that
total debits were equal to total credits across all accounts.
Accountants would literally spend hours or even days trying to work out
where they'd messed up if these totals didn't match each other exactly.
Thankfully nowadays this check is done for us automatically
when we use accounting software but to us accountants
the trial balance is still an internal document that we use to check for errors.
There are whole bunch of ways that those errors can still sneak their way into here.
If you'd like to learn more about that then check out my trial balance video
which you can find up here. Another way that we accountants
use the trial balance is to help us put together financial statements.
You can think of financial statements as formal reports that we use to summarise
a business's financial performance, position and cash flow.
The three main types of financial statement are the income statement,
the balance sheet and the cash flow statement.
The balance sheet is a snapshot of a business's assets, liabilities and equity
at a single point in time. While this definition might sound
similar to the trial balance it's actually quite different.
A balance sheet looks like this. We have all of our window cleaning business’s
assets liabilities and equity laid out for us separately on one page.
At the bottom we have our total assets and our total liabilities plus equity.
After all we are double entry accounting so the balance sheet has to balance.
We accountants prepare financial statements like the balance sheet to give our business’s
key stakeholders an idea of its financial health.
Who are the stakeholders? Our existing and potential
investors, lenders and creditors external parties that want to know
about our financial position. On the other hand
the trial balance is used internally by us accountants
to check the integrity of our financial data.
We run the trial balance as often as we need to get the job done.
Whereas typically we only put together a balance sheet where we need to
at the end of each financial year that's when we have to report our results
to the external parties that I mentioned a moment ago.
So you have two very different reports with two very different purposes.
But here's where things get interesting. I mentioned earlier that we accountants
use the trial balance to help us prepare financial statements
and the balance sheet is a financial statement one of the most important ones.
So when it comes to reporting time we begin by running a trial balance.
This is our starting point the foundation that we use
to build the balance sheet. We can see that here in our
window cleaning business. Cash, supplies and equipment
are all types of assets that we report in the assets section
of our balance sheet. Accounts payable and long term loans
are both liabilities which we report in the liabilities section
and owner's equity… Yes you guessed it
is a type of equity which goes here in the equity section
of the balance sheet. Finally revenue, cost of sales
and laundry costs are a bit more complicated. Not too complicated
just a bit because they get reported in
two different financial statements. The income statement which we
use to track our profit and then again
in the balance sheet in the equity section because retained earnings
and make up our profits held for future use. You might be wondering why
these totals are different? That's because we netted together some
of our debits and credits in the income statement
before we took the profit through to the balance sheet.
So the trial balance and the balance sheet are two different reports
but they have a strong link that binds them together
we use the trial balance to create the balance sheet.
Now that last bit where I mentioned retained earnings and equity
can be a bit confusing. If you'd like to learn more about it
then I recommend you check out my equity video
which you can find up here. Give this video a big old like
if you found it useful why not
it doesn't hurt. I release new accounting tutorials
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missing out on those and as always if you've got any questions
you can reach me in the comments or message me
on Instagram @accountingstuff
Cya