Trial Balance vs Balance Sheet

Jun 27

The trial balance and balance sheet are easy to confuse. Knowing how they work together helps you keep your books clean and your reports reliable.

What Is a Trial Balance?

A trial balance checks whether your books are balanced. It lists each account's ending balance and confirms that total debits match total credits. If the totals don't align, there is likely an error in your ledger.

Most accounting services for small businesses prepare a trial balance monthly or quarterly. It's a behind-the-scenes report used to catch mistakes before building formal statements.

What Is a Balance Sheet?

The balance sheet outlines your business’s assets, debts, and overall value. It lists assets, liabilities, and shareholders' equity at a specific point in time.

Most small businesses prepare a balance sheet at year-end or quarterly if they are required to do so. C corporations, for example, are legally required to submit a balance sheet to the IRS as part of their annual return. It follows a standard format and helps support decisions about funding, compliance, and growth.

Key Differences Between Trial Balance and Balance Sheet

Understanding how these two reports differ helps you use each one correctly.

Purpose and Use

The trial balance is a working tool used to check internal accuracy during the bookkeeping process.
The balance sheet is the polished result used to communicate your financial position.

Frequency of Preparation

Trial balances are prepared throughout the year to stay on top of potential bookkeeping errors.
Balance sheets are usually created at the end of your accounting period or as needed for external reporting.

Content and Structure

A trial balance lists all ledger accounts and shows debits and credits in two columns side by side.
The balance sheet summarizes only assets, liabilities, and equity and uses the accounting equation: Assets = Liabilities + Equity.

Compliance Level

Trial balances are informal and do not follow a fixed layout because they're used internally.
Balance sheets are formal statements that must adhere to accounting standards because they are often reviewed by banks, auditors, or investors.

How the Trial Balance Leads to the Balance Sheet

Once your general ledger is updated with all journal entries, a trial balance is created to confirm the books are balanced. From there, accounting professionals make necessary adjustments, like recording depreciation and accrued expenses. These updates produce the adjusted trial balance, which becomes the foundation for your balance sheet and other financial statements.

Simplified Workflow:

General Ledger → Trial Balance → Adjusted Trial Balance → Balance Sheet

Why They Matter for Financial Reporting

Both the trial balance and balance sheet support stronger financial decisions. When used together, they help small business owners stay organized, secure funding, and prepare for tax season.

When the trial balance catches errors early, it protects your business from problems that might otherwise go unnoticed until year-end. For service-based businesses with frequent billing or product-based companies managing inventory, early correction helps keep everything on track.

The balance sheet gives a snapshot of your company's financial position. It shows lenders your ability to borrow and helps guide long-term planning. Clean financial data makes this report more useful and reliable.

How the Trial Balance Supports Year-End Prep

The trial balance lays the groundwork for your year-end reports. It is a key step in the accounting cycle that ensures your books are accurate before anything is finalized.

Accounting professionals use the trial balance to find errors, reconcile accounts, and apply adjustments. Once that's complete, they prepare an adjusted trial balance that will lead directly to the creation of the balance sheet.

If the trial balance is off, your balance sheet will be too. That's why accurate entries and regular reconciliation throughout the year make closing your books faster and far less stressful.

Schedule a consultation with our tax professionals to check your trial balance or balance sheet.

Real-World Scenario

A small retail business owner reviews the monthly trial balance and notices a $5,000 difference between debits and credits. This signals an error that needs correction.

Their accounting professional investigates and finds that inventory was recorded as an expense instead of an asset. If left uncorrected, this would misstate the year-end balance sheet by understating the business's assets and overstating its expenses.

The accounting professional fixes the journal entry and updates the records. This balances out the trial balance and the final balance sheet then reflects the business's true financial position.

Catching errors early like this saves delays and stress at tax time and when applying for loans. If you're still getting comfortable with financial reports, our Bookkeeping for Beginners Guide will help you build a strong foundation and avoid mistakes like this in the future.

Common Misconceptions

Small business owners sometimes confuse the trial balance and the balance sheet. Here are some common misconceptions:

"The trial balance is a financial statement."

The trial balance is not a financial statement. It is an internal tool used to catch bookkeeping errors. The balance sheet is a formal financial statement shared with lenders, investors, and tax authorities.

"If the trial balance is balanced, everything is correct."

A balanced trial balance does not mean everything is correct. It only confirms that debits equal credits. It won't catch mistakes where entries have been posted to the wrong accounts, entered twice, or not made at all.

"The balance sheet is prepared before the trial balance."

The balance sheet is prepared after the trial balance, not before it. The balance sheet is built after adjustments are made to the trial balance.

"Trial balances are not necessary because I use accounting software."

Even if you are using accounting software, trial balances are still useful. Software can automate entries, but it can't guarantee they're posted correctly. A trial balance helps verify accuracy before preparing financial statements.

"Only accounting professionals need to worry about these reports."

Small business owners also benefit from understanding both of these reports. They help owners catch errors early and make smarter financial decisions.

When to Get Help From an Accounting Professional

If you're unsure how to read your trial balance or balance sheet, or even how to create them, you're not alone. Trial balances, journal entries, year-end adjustments, and financial statements are hard to manage properly without experience.

An accounting professional can help you interpret your balance sheet for planning, apply the right adjustments to your trial balance, and prepare financial statements for lenders, investors, or tax filing. They can also catch errors that software may miss.