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How is the balance sheet prepared from trial balance?
Let us understand the concepts of balance sheet and trial balance, before learning how to prepare a balance sheet from the trial balance.
Balance sheet
Balance sheet is one of the important fundamental financial statements for both accounting and financial modeling. This sheet consists of the company’s assets, liabilities and equity.Balance sheet consists of two sides. One side consists of company assets and the other side consists of both liabilities and equity.
Trial balance
In simple words, trial balance is the summary of all business activities and indicates business financial health. Investors decide whether to invest or not based on the company’s trial balance.
For understanding trial balance, one should be aware of the Double entry system, journal and ledger. Each transaction is entered twice which is of opposite nature is called the Double entry system.
Transactions recorded in the double entry system are called journals and summary of all journals is called ledger. Methods used in trial balance are total method (no concern of closing balance) and balance method (concern of closing balance).
Following steps explains the preparation of balance sheet from trial balance −
Step 1 − Prepare the trial balance by recording general ledger account balances in a spreadsheet. (Or) nowadays, trial balance is prepared by using accounting softwares.
Step 2 − Next step is to prepare adjusted trial balance, in compliance with the accounting framework like generally accepted accounting principles (GAAP) or internationally financial reporting standards (IFRS) trial balance has to be adjusted.
Step 3 − Except assets, equity and liability accounts, remaining accounts are eliminated.
The accounts eliminated from trial balance are used to prepare income statements.
Step 4 − Aggregate the accounts in trial balance into used lines in the balance sheet.
| Lines used in balance sheet | |
|---|---|
| Cash | Accounts receivable |
| Inventory | Fixed assets |
| Other assets | Accounts payable |
| Accrued liabilities | Debt |
| Other liabilities | Common stock |
| Retained earnings | |
Verify the balance with the equation assets is equal to liabilities plus stockholders' equity.
After verifying, the final balance sheet of required format is prepared (comparative format etc.)
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