How to create a balance sheet from the test balance sheet

It is important to understand what the terms trial balance sheet and balance sheet mean before learning how to make a balance sheet from a trial balance sheet. So this article explains

1. What is a test credit?

2. What is a balance sheet?

3. How do you create a balance sheet from the test balance sheet?

What is a test credit?

A trial balance is a statement that provides a clear overview of all ledger balances at any given point in time. The main goal of creating a trial balance is to ensure that all journal entries and general ledger balances recorded are mathematically correct. A trial balance provides all of the ending balances in a single document; all debit balances are recorded in one column, all credit balances in another. Hence, it is easy to use as a reference book.

A trial balance mainly consists of 3 columns. In column 1, all descriptions of the individual G / L accounts are recorded (e.g. cash in hand, receivables, operating resources, bank loans). Column 2 is the debit balance column where all ending balances are recorded. Column 3 is dedicated to the recording of all credit balances.

Eg: Cash is an asset, so the ending balance is debited

The bank loan is a liability, so the final balance is credited How to draw up a balance sheet from the trial balance - trial balance

How to prepare a trial balance

What is a balance sheet?

Balance sheet, also known as the balance sheet, is one of the most important annual financial statements prepared by companies along with the income statement (record of the company's operating and non-operating income and expenses over a accounting period) of cash flow (statement that reflects how the cash flow was influenced by changes in assets, liabilities, income and expenses) and the statement of changes in equity (development of equity over a accounting period).

Format of the balance sheet

The format of the balance sheet is drawn up according to the main accounting formula:

Long-term assets + short-term assets = equity + long-term debt + short-term debt

Capital assets

Long-term investments, the value of which is not realized within the accounting year.

e.g. tangible assets, machines

Current assets

Assets that can reasonably be expected to be converted into cash within the accounting year.

For example, cash and cash equivalents, trade receivables

equity capital

Securities that represent the owner's interest in the company

For example, ordinary shares, retained earnings

Long-term liabilities

Long-term financial commitments that do not fall due within the accounting period

Eg long-term loans, liabilities from bonds

Short term liabilities

Short-term financial obligations, the settlement of which is due within the accounting period

B. Accounts payable, interest payable

Both the trial balance sheet and the preparation of the balance sheet are part of the subsequent accounting cycle.

How to create a balance sheet from the test balance sheet

How to create a balance sheet from the test balance sheet

From what has been said above, it becomes clear that the trial balance is an interim statement that helps with the preparation of the annual financial statements. Once the trial balance is drawn up, certain adjustments are made, such as revenue provisions, expense provisions, prepayments, and depreciation.

From what has been said above, it becomes clear that the trial balance is an interim statement that helps with the preparation of the annual financial statements. Once the trial balance is drawn up, certain adjustments such as sales provisions, expense provisions, prepayments and depreciation are also made. The resulting trial balance is referred to as the "adjusted trial balance".

The above process is a time-consuming and tedious process that requires a significant amount of paperwork. The number of transactions a company makes in a billing cycle (most billing cycles are one year) can be enormous. While all transactions are journaled as they arise, when they are recorded in the ledgers they are broken down into a series of accounts. The final balances on the G / L accounts are included in the trial balance. Thus, once completed, the balance sheet serves as a summary of all records of financial information that can be used to prepare the final invoice. How to create a balance from the test balance - 2

The trial balance includes the closing balances of assets, liabilities, equity, income and expenditure. The balances of income and expenses are recorded in the income statement, while the balances of assets, liabilities and equity are recorded in the balance sheet.

For example, if the closing balance of the accounts receivable is $ 2250, this is the amount that must be included on the balance sheet as the final accounts receivable amount.

The income statement must be prepared before the balance sheet, as the net income (total income - total expense) or the loss amount must be recorded in the equity area of ​​the balance sheet. In the balance sheet, the sum of assets should be equal to the sum of liabilities and liabilities. Even if the balance of the court hearing is balanced, this does not guarantee the accuracy of the annual financial statements. This is because not all errors in the billing process are recorded in the trial balance.

For example, if a $ 500 cash sale is completely omitted from the records, it will not result in a mismatch in the test balance. However, in this situation, inventory is overvalued by $ 500 and cash is undervalued by $ 500.

Reference list:

“What is the difference between a diary and a ledger? - Questions & Answers - Accounting Tools. ” Accounting CPE & Books - AccountingTools . Np, nd web. January 26, 2017.
"Accounting trial balances and preparation of financial statements." Money teacher. Np, nd web. January 26, 2017.
"Test credit." Investopedia . Np, April 08, 2015. Web. January 26, 2017.
"All the advantages and disadvantages of Trial Balance." Information Bank. Np, October 02, 2016. Web. January 26, 2017.

Image courtesy:

“Restricted cash” by Zceisab - Own work (CC BY-SA 4.0) via Commons Wikimedia

“DWBA Trial Bal” by John M PASSMORE - Accounting for a Better Life isbn 978-1-905886-66-1 (GFDL) via Commons Wikimedia

About the author: Dilini

Dilini is a management and financial accountant with an MBA. Knowledge sharing is very important to her and her areas of interest include research methods, marketing, management accounting and financial accounting.