How to Prepare Balance Sheet from Trial Balance?
The financial statements balance sheet and income statement are prepared using the trial balance and additional information. The accounting transaction is first posted as journal entries, then posted to the general ledger, and then flows into the trial balance.
What is a trial balance?
A trial balance is a statement that lists all the general ledger accounts and sums up their balances. It lists all the debit and credit balances. The sum of all the debit balances must equal the credit balances. If it doesn’t tally, then there are some errors in trial balances. The preparation of a trial balance helps in easy checking and locating any errors in the overall accounts.
What is the balance sheet?
The balance sheet is a financial statement that shows the financial position of the company on a particular date. It helps us to know what a company owns and what a company owes. It shows the business’s net assets or worth (difference between assets and liabilities).
How to prepare a Balance Sheet from Trial Balance?
In order to prepare a balance sheet, we need to collect the information—assets, liabilities, owner equity, and other information—from the trial balance.
Let’s understand with an example:
Following is the trial balance of XYZ company on 31st December 2022
TRIAL BALANCE FOR XYZ at 31st December 2022
|
|
DEBIT in $ | CREDIT in $ |
|
Capital account |
|
5,000 |
|
Drawing |
5,900 |
|
|
Purchases |
73,000 |
|
| Sales |
56,000 |
|
|
Commissions |
720 | |
| Bank Charges | 910 |
|
|
Interest Expense |
1,000 | |
| Rent Expenses | 550 |
|
|
Depreciations |
420 | |
|
Tax Expense |
620 |
|
| Receivables | 10,200 |
|
|
Payables |
9200 | |
| Cash | 20,000 |
|
|
Furniture and Equipment |
15,000 |
|
| Loan |
21,000 |
|
|
Insurance |
3,080 | |
| Owner Equity |
10,000 |
|
|
|
116,400 | 116,400 |
Now let’s look at the following figures:
Assets
- Cash
- Furniture
- Receivables
Liabilities
- Loans
- Payables
Owner’s Equity
- Capital
- Owner’s Equity
- Drawings
The above figures will flow into the balance sheet. The basic equation of the balance sheet is:
Assets – liabilities = Owner’s Equity (Net Assets)
Using the figures from the trial balance, we can prepare the balance sheet below. Note that there are two methods of preparing a balance sheet: the “T” format and the list format. Either of the two can be used, the only difference is the way of representing the information.
|
BALANCE SHEET FOR XYZ AS ON 31 DECEMBER 2022 |
|||
|
ASSETS |
AMT IN $ | LIABILITIES |
AMT IN $ |
|
Cash |
20,000 | Loan | 21,000 |
| Furniture | 15,000 | Payables |
9,200 |
|
Receivables |
10,200 | ||
| TOTAL ASSETS | 45,200 | TOTAL LIABILITIES |
30,200 |
|
|
Owner’s Equity | ||
| Capital |
5,000 |
||
|
|
Add: Owner’s Equity at the beginning | 10,000 | |
| Less: Drawings |
5,900 |
||
|
|
Add: Net profit after tax | 5,900 | |
| OWNER EQUITY |
15,000 |
||
|
TOTAL |
45,200 | TOTAL |
45,200 |
Note: The net profit is calculated from the profit and loss account. Here, net profit is assumed.
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