Adjusted Trial BalanceWhat is it and why you should prepare it

So you’re done with your unadjusted trial balance.

You’ve checked its balances (and they match).

You made sure that all errors were detected and corrected.

You’re ready to take the next step.

So, what comes next? Is it finally the preparation of the financial statements?

Well, if you’ve read my write-up for “unadjusted trial balance”, you would know that the next step isn’t the preparation of financial statements.

Rather, it is the preparation of your adjusted trial balance.

In the previous write-up, we learned that an unadjusted trial balance is just the first of the three trial balances that you have to prepare.

The adjusted trial balance is the second.

How often you prepare an adjusted trial balance depends on how often your financial statements are prepared.

If your business prepares monthly financial statements, then it follows that you’d also prepare an adjusted trial balance each month.

This is because the financial statements use the adjusted trial balance as a reference.

This article will provide you with information about the second of the three trial balances: adjusted trial balance.

You will learn what an adjusted trial balance is, why it is prepared, and how it is prepared.

And even if you’re not the one in charge of the preparation of your business’s financial statements, it’s still worthwhile to read this article.

Having a little bit of accounting knowledge does not hurt anyone after all. 

What is an adjusted trial balance?

Just like an unadjusted trial balance, an adjusted trial balance is an organized listing of the accounts you’ll find in a general ledger.

The difference is that the adjusted trial balance applies the effects of adjusting entries.

So while an unadjusted trial balance is prepared before adjusting entries are made, an adjusted trial balance is prepared after adjusting entries are made.

As it is a trial balance, it follows that its total debit and credit balances must match.

Adjusting entries are prepared to correct and update the initial version of the trial balance which is the unadjusted trial balance.

Aside from that, the adjusting entries applied to the trial balance also serve the purpose of bringing a business’s financial statements into compliance with the GAAP or IFRS.

More often than not, the figures you’ll find in an unadjusted trial balance are not what you’ll see in a business’s financial statements.

This is because these figures are prepared before any adjustments are made such as accruals, depreciation, amortization, etc.

The adjusted trial balance fixes this by applying the adjusting entries to the appropriate accounts.

After applying the adjustments, you’ll have a trial balance that is suitable for the preparation of financial statements.

Just like the general ledger, the adjusted trial balance, or any trial balance for that matter, only shows a summary of the account’s balances.

It does not show the details of transactions regarding the accounts.

For that, you will have to look into the journals and subsidiary ledgers.

Take note though that the adjusted trial balance is not a financial statement.

That moniker goes to the balance sheet, income statement, and cash flow statement.

However, it is still an important report as it is where the information you need for the preparation of financial statements can be found.

Why prepare an adjusted trial balance

Some automated accounting systems go away with the preparation of trial balances, particularly those with GL systems that don’t allow unbalanced GL postings.

Since unbalanced postings are not allowed, you can be sure that debit and credit balances will be equal.

However, it’s not like all businesses use an automated accounting system.

Some businesses cannot afford automated accounting systems, and thus, they still manually prepare their financial statements.

The practice of preparing trial balances still exists today because of this.

With that said, an adjusted trial balance is prepared for the following purposes:

To be used as a reference for the preparation of financial statements

The primary purpose of an adjusted trial balance is to have a report that can be used as a reference for the preparation of a business’s financial statements.

The unadjusted trial balance isn’t suitable as a reference because it does not necessarily comply with accounting standards (GAAP and IFRS).

The adjusted trial balance captures the necessary adjustment such as accruals, deferral, depreciation, amortization, etc.

Thus, it complies with the accrual accounting method which is employed by the GAAP and IFRS.

To summarize balances after adjusting entries are applied

Just like the unadjusted trial balance, an adjusted trial balance lists all of a business’s account balances.

The added benefit is that it shows the balances after the adjusting entries are applied.

Meaning that they are updated and compliant with the GAAP or IFRS.

To ensure that the adjusting entries were done correctly

Before transferring the account balances into the financial statements, you must ensure first that the adjusting entries are correct.

With the help of an adjusted trial balance, verifying journal entries is easier.

Since all accounts are listed in one document, it’s easier to see which accounts need adjustments.

It is important to verify the correctness of your adjusting entries.

If the entries made are incorrect, then it’ll follow that financial statements will be inaccurate.

To verify that the debit and credit balances match after the Application of Adjusting Entries

Along with the verification of the correctness of adjusting entries comes the verification of balances.

Since an adjusted trial balance is still a trial balance, it should be “balanced”.

That means that its debit and credit balances should be equal.

If they are not, then there is an error in the application of adjusting entries.

Such error must be detected and corrected before the adjusted trial balance can be used for the preparation of financial statements.

For Management Use

Adjusted trial balances are not financial statements and as such, are not suitable for external use.

Rather, they are for internal use when the use of financial statements is not yet necessary.

Unless a business is using an automated accounting system that can generate financial statements directly from the general ledger, preparing financial statements will take time.

Preparing trial balances, adjusted trial balance included, takes less time and are easier to prepare than financial statements.

A trial balance, particularly the adjusted trial balance, has all the information that can be found in financial statements.

This could be enough for internal reports that are immediately needed at the start of the month.

Adjusting Entries – What are They?

At the end of an accounting period, some journal entries are entered into the general journal.

These entries are what we call adjusting entries.

They are typically prepared after a trial balance, particularly an unadjusted trial balance has been prepared.

These adjusting entries allow the adjustment of a business’s accounts (e.g. revenue, expense accounts, etc.) so that they are recorded within the period that they occur.

This is important for compliance with GAAP or IFRS which employ the accrual accounting method.

In short, adjusting entries ensure that your financial statements only contain information that is relevant to the period that is being reported.

The following are the four main types of adjustments that require the use of adjusting entries:

Deferrals

Refer to transactions that are not yet earned or incurred during the period being reported.

As such, they must be removed from the current period.

For example, you received an advance payment from a customer on the last day of the month.

Since it was given to you late during the day, you were unable to fulfill your obligation by the end of the month.

As such, the revenue is not yet earned and must be deferred until the obligation is fulfilled.

Accruals

Accruals are the opposite of deferrals.

They are transactions that are earned or incurred within the period being reported, however, no payment has been received or made yet.

Since they occurred within the period, they must be included.

For example, you pay your employees’ salaries and wages every 5^th and 20^th of the month.

That means that at the end of the month, the salaries and wages for the 21^st day until the last day of the month are still unpaid.

However, they are already incurred, and as such, an accrual must be recorded.

Missing Transaction Adjustments

Sometimes, the person in charge of the journal may fail to journalize some transactions.

For example, a business purchase was paid using the personal credit card of one of the directors.

In such a case, since the resources of the business were not used, the bookkeeper may miss the transaction.

These “missing transactions” often come to attention at end of the period.

Tax Adjustments

Refer to accounts that can either increase or reduce tax obligations (e.g. write-off of bad debts, depreciation and amortization, etc.).

These tax adjusting entries help you account for the tax obligation of the business.

How to prepare an adjusted trial balance

To prepare an adjusted trial balance, we must establish first if we’re going to use the general ledger or unadjusted trial balance as the base.

For this article, we will assume that an unadjusted trial balance has already been prepared, which we will use as the base for our adjusted trial balance.

For now, this will be the unadjusted trial balance that we will use:

Next, we must determine the necessary adjusting entries to be made.

Let’s assume that company X has the following adjusting entries:

We then apply these adjusting entries to the corresponding accounts in the unadjusted trial balance

And now, we have our adjusted trial balance:

This adjusted trial balance will then be used for the preparation of company X’s financial statements.

The revenue and expenses accounts will be used for the preparation of the income statement.

The asset, liabilities, and equity accounts will be used in the preparation of the balance sheet.

Lastly, any accounts that affect the cash flow will be used in the preparation of cash flow statements.