Adjusted Trial Balance
Accounting cycles are vital in recording a company’s financial interactions and their resulting financial standing. It begins from the first transaction up to the final balancing. The most important part of this cycle is the trial balance. A trial balance is a document that shows a business’s accounting information. It helps greatly in creating financial statements and in detecting discrepancies in the accounting process.
Trial balances contain all of a company’s financial transactions. Because it has a complete record, this document is able to show the progression of accounts, illustrating the financial changes that the company went through. As it is, a trial balance cannot be called a financial statement. But it is a core ingredient in creating all the necessary statements like balance sheet, cash flow statement, and income statement.
With the help of accounting software, most accounting processes can be done on a computer. But if you want to go old school and do things manually, you’ll have to go through all of the steps in an accounting cycle. Most of your effort will be poured into adjusting trial balances.
What is an adjusted trial balance in accounting?
A trial balance can be called unadjusted or adjusted. An unadjusted trial balance happens when account balances are calculated at the end of a period without adjusting entries to balance it properly. For companies that rely on accounting software, unadjusted balances will rarely be a concern. But for those doing manual computations, unadjusted trial balance is where to start.
This trial balance is only helpful for double-entry bookkeeping since it requires entries to be balanced. Single-entry systems make it impossible for the debit and credit figures to be equal and will not benefit from an unadjusted trial balance.
The simplest adjusted trial balance definition is that it’s the result of adjusting entries listed on an account balance. This part of the process is for double-checking that only important information is reflected in the financial statement. There are different kinds of adjustments to do to a trial balance:
- Accruals are the expenses that the company needs to pay. Adjusting entries means that payments for rent, loan, etc., are reported.
- Deferrals refer to money that does not belong within the period you are accounting for. If a client gave a down payment for March, it would not be recorded in the financial statement for February.
- Missing Transaction Adjustments are for any expenses forgotten when bookkeeping. For example, minor inventory purchases slipped through the cracks and were not initially reported.
- Tax Adjustments account for all expenses due to taxes. Deductions, depreciations, exemptions are some of the usual adjusted entries.
How to Prepare an Adjusted Trial Balance
Some wonder why an adjusted trial balance is important when unadjusted trial balances exist. “What is the purpose of the adjusted trial balance?”, they ask. Well, without adjusting the entries for an account, discrepancies are bound to occur more often. A singular checking over of a financial statement might not be enough to catch mistakes and potentially open the business to complications (e.g., missed expenses, overpayments). The purpose of adjusted trial balance is to catch and repair these mistakes before they cause bigger issues.
Preparing an adjusted trial balance requires you to make journal entries specifically designed to account for adjusting entries. Follow these steps as a guide:
- Create an unadjusted trial balance. To give yourself a general perspective of the accounts, make an unadjusted trial balance. This will serve as the summary or outline of information before you begin adjusting the entries needed.
- Begin adjusting entries. This is where you can add or deduct any figures that were overlooked or changed in the prior balancing stage. Adjusted entries can be prepayments, debt expenses, interest, payroll, etc.
- Record the adjusted trial balance. Ensure all the entries you put are accurate and match the data from the unadjusted trial balance and adjusted entries. You can do this by comparing the balance totals; the result must be similar figures.
Example of an Adjusted Trial Balance
Look at this table for an adjusted trial balance example:
| SHIFTKEYS INC. | |||
|---|---|---|---|
| Trial Balance | |||
| February 29, 20XX | |||
| Unadjusted Trial Balance | Adjusting Entries | Adjusted Trial Balance | |
| Balance | 10000 | 10000 | |
| Accounts Receivable | 12000 | 12000 | |
| Prepaid Rent | 81000 | -800 | 80200 |
| Inventory | 10000 | 10000 | |
| Accumulated Depreciation | -10500 | -500 | -11000 |
| Accounts Payable | -15000 | -15000 | |
| Notes Payable | -8000 | -8000 | |
| Common Stock | -15000 | -15000 | |
| Revenue | -24100 | -24100 | |
| Payroll Expense | 11000 | 11000 | |
| Rent Expense | 8000 | 8000 | 8000 |
| Utilities Expense | 6000 | 6000 | |
| Depreciation Expense | 7500 | 500 | 8000 |
| TOTAL | 72900 | 0 | 72900 |
Following the steps discussed before, the process will look like this:
Step 1: Create an unadjusted trial balance.
| SHIFTKEYS INC. | |||
|---|---|---|---|
| Unadjusted Trial Balance | |||
| Debit | Credit | ||
| Balance | 10000 | ||
| Accounts Receivable | 12000 | ||
| Prepaid Rent | 81000 | -800 | |
| Inventory | 10000 | ||
| Accumulated Depreciation | 10500 | ||
| Accounts Payable | 15000 | ||
| Notes Payable | 8000 | ||
| Common Stock | 15000 | ||
| Revenue | 24100 | ||
| Payroll Expense | 11000 | ||
| Rent Expense | 8000 | ||
| Utilities Expense | 6000 | ||
| Depreciation Expense | 7500 | ||
| TOTAL | 726000 | 726000 | |
Step 2: Begin adjusting entries.
| SHIFTKEYS INC. | |||
|---|---|---|---|
| Adjusted Entries | |||
| Debit | Credit | ||
| Prepaid Rent | 800 | ||
| Accumulated Depreciation | 500 | ||
| Rent Expense | 800 | ||
| Depreciation Expense | 500 | ||
| TOTAL | 726000 | 726000 | |
Step 3: Record the adjusted trial balance.
| SHIFTKEYS INC. | |||
|---|---|---|---|
| Adjusted Trial Balance | |||
| Debit | Credit | ||
| Balance | 10000 | ||
| Accounts Receivable | 12000 | ||
| Prepaid Rent | 80200 | ||
| Inventory | 10000 | ||
| Accumulated Depreciation | 11000 | ||
| Accounts Payable | 15000 | ||
| Notes Payable | 8000 | ||
| Common Stock | 15000 | ||
| Revenue | 24100 | ||
| Payroll Expense | 11000 | ||
| Rent Expense | 8000 | ||
| Utilities Expense | 6000 | ||
| Depreciation Expense | 8000 | ||
| TOTAL | 726000 | 726000 | |
Adjusted Trial Balance Frequently Asked Questions
What is the purpose of an adjusted trial balance?
Like previously said, adjusted trial balances are there to help you catch errors in accounting. It serves as a summary of all of the business’s transactions, and is what makes financial statements readable to a layperson.
What are the most common adjusted entries in a trial balance?
Prepayments, payroll expenses, rent, credit loans, and accruals are some of the most commonly adjusted entries.
Are unadjusted balance entries not enough?
Unadjusted trial balances only serve as a general road map, but it is not always accurate, nor is it as informative. Some entries may be missed in the initial input. Adjusting it will help mitigate the errors made in the first pass.
Best Accounting Software for Preparing an Adjusted Trial Balance
- QuickBooks Desktop
This accounting software is one of the most popular on the market. They innovated their program and even changed the accounting terms used to simpler words (e.g., accounts payable = bills). Basically, it is easy to use, even for newbies.
QuickBooks comes preloaded with account charts, plus features such as auto-reconciliation, bank entry uploading, and reporting. They also have special features for different industries like manufacturing, nonprofits, etc.
QuickBooks has reporting customization features that will make a summary or detailed trial balances for adjusted trial balancing. Beginning totals, adjusted entries, and ending balances are also displayed.
- Accountant’s Relief
This software is part of a suite of program created called “Accountant’s Office” by AccountantsWorld. Kind of like a Microsoft Office program specifically for accountants.
Aside from its many useful features, Accountant’s Relief has plenty of properties needed for trial balancing. Most notable of which is the customization feature where users can pick and choose which columns are needed. Another perk to Accountant’s Relief is its mixed features of both write-up and trial balance systems.
- AccountEdge Pro
AccountEdge Pro is a suitable program for many small businesses; many users recommend it for a startup or growing company. This allows on-site and cloud access, making it a very flexible software, especially for distanced interactions between two parties.
Part of the package is a trial balance summary report and trial balance detail report. The detailed report displays information on all presently used ledger accounts.
- Trial Balance CS
Creative Solutions made this accounting application suite, part of which are write-up applications and a trial balance package.
Unlike a similar Creative Solutions software (Write-Up CS), Trial Balance CS completely focuses on the accountant’s needs. Like a jack-of-all-trades program, it is able to do summary or detailed entries for trial balances or financial statements. These outputs can be easily transferred into a tax return prep app, like CS’s UltraTax. An additional program will let users track trial balance progress.
The Adjusted Trial Balance is Key to Accurate Financial Statements
This has been highlighted multiple times throughout this article, but let us say it again: adjusted trial balance is the key to accurate financial statements. Adjusted trial balances are one of the last pillars of defense when it comes to accounting errors.
The two trial balances, unadjusted and adjusted, have major parts in all accounting cycles. First and foremost, it makes financial statements readable; without it, accounting sheets will be unintelligible for a normal person. Most importantly, an adjusted trial balance shows an accurate reflection of a business’s state when done correctly.
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