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What is a Trial Balance?
The trial balance is a part of a company’s internal records used to prepare the financial statements. It gets its information from the balances reported in the general ledger accounts. Usually, the trial balance includes both income statement and balance sheet items. However, some versions of this report may also consist of only balance sheet balances.
A trial balance enlists all balances from general ledger accounts at a particular time. It includes at least three columns, including the account name, debit, and credit side. Each item in the trial balance also consists of its balance on its relative debit or credit column. Usually, it enlists balances related to assets, liabilities, equity, income, and expenses.
What is an Adjusted Trial Balance?
Usually, companies prepare the trial balance at the end of each fiscal period. At that point, it only includes balances from the general ledgers, as stated above. However, companies must also make year-end adjustments, known as adjusting entries. Once companies pass these entries, they prepare the trial balance again. It is called the adjusted trial balance.
The adjusted trial balance is the final document to prepare the financial statements. Without adjusting entries in this record, companies cannot document their finances. However, it does not differ from the unadjusted version in its format. It uses the same three-column approach to reporting closing balances. However, companies may include other information in this format, like account numbers, etc.
The essence of the adjusted trial balance is the year-end adjusting entries. These entries convert the unadjusted trial to the adjusted version. Usually, year-end adjusting entries include the following items.
- Depreciation of tangible fixed assets.
- Amortization of intangible assets.
- Inventory adjusting entries.
- Accrued expenses.
- Prepayments or prepaid expenses.
- Unearned or deferred income.
- Bank reconciliation adjusting entries.
- Impairment of assets.
- Revaluation adjusting entries.
What is the importance of the Adjusted Trial Balance?
The adjusted trial balance is crucial in allowing companies to prepare financial statements. It also helps accommodate adjusting entries at the end of a fiscal period. Consequently, it allows for a more accurate presentation of finances in the financial statements. The adjusting trial balance is also a critical part of the accounting process, getting its data from the general ledger and unadjusted trial balance.
The adjusted trial balance also helps verify the total of the debit and credit balances in the general ledger. By balancing these items, companies can ensure that the accounting entries within the accounting system are complete. Similarly, the adjusting trial balance also helps provide a summary of all general ledger accounts before reporting them in the financial statements.
How to prepare the Adjusted Trial Balance?
Companies prepare the adjusted trial balance through a process. This process includes the following steps.
- Record all transactions in the accounting system.
- Prepare the general ledger and calculate the closing balances on each account.
- Prepare the unadjusted trial balance.
- Record the year-end adjusting entries.
- Prepare the adjusted trial balance.
Conclusion
The trial balance is a crucial document used in preparing financial statements. It includes all balances in the general ledger. Usually, companies prepare this record at the end of each fiscal period. Once they do so, they pass adjusting entries which help create the adjusted trial balance. It is the final document used to prepare financial statements.
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