An adjusted trial balance is a report in which all debit and credit company accounts are listed as they will appear on the financial statements after making adjusting entries. This is usually the last step in the accounting cycle before the preparation of financial statements.
The Accounting Cycle Example
Throughout this series on the accounting cycle, we will look at an example business, Bob’s Donut Shoppe, Inc., to help understand the concepts of each part of the accounting cycle. Below is the complete list of accounting cycle tutorials:
- Journal Entries
- Unadjusted Trial Balance
- Adjusting Entries
- Adjusted Trial Balance (you are here)
- Preparing Financial Statements
- Accounting Worksheet
- Closing Entries
- Income Summary Account
- Post-Closing Trial Balance
- Reversing Entries
We also have an accompanying spreadsheet which shows you an example of each step.
Adjusted Trial Balance Purpose
Preparing an adjusted trial balance can serve a variety of purposes:
- The main purpose is to show that the debit column totals match with the credit column totals.
- It is useful to determine for the companies that the adjusting entries are made correctly.
- It also helps in monitoring the company’s performance as it is a final version of the accounts and gives a clearer picture altogether.
Adjusted Trial Balance Preparation
An adjusted trial balance will have three columns (account names, debit and a credit column) and will look just like an unadjusted trial balance. Like an unadjusted trial balance, it will have accounts listed in order of either their account numbers or in the order they appear on the balance sheet.
Totals of both the debit and credit columns will be calculated at the bottom end of the trial balance. These columns should balance, otherwise, it would likely mean that there has been an error in posting of the adjusting entries.
The adjusted trial balance should have a proper header that should be in a similar format as below:
Adjusted Trial Balance
As of January 31, 2020
There are two ways to prepare an adjusted trial balance.
The first method is to recreate the t-accounts but this time to include the adjusting entries. The new balances of the individual t-accounts are then taken and listed in an adjusted trial balance. This means repeating the accounting cycle again.
Another simpler way is to add the adjustment amount for the accounts that have been changed directly to the unadjusted trial balance. There is no need to list down accounts in the adjusted trial balance that have a zero balance. Only those accounts that will appear on the financial statements need to be listed.
Adjusted Trial Balance Errors
Does Not Balance
If the totals of debit and credit columns of the adjusted trial balance do not balance, one of the following errors might have occurred:
- A debit amount is erroneously posted as a credit amount or vice versa.
- The balances of the t-accounts are incorrect.
- The debit and credit columns of the adjusted trial balance have been totaled wrong.
- One or more of the individual ledger account balances have not been listed in the trial balance report.
- Duplication in the listing of one of the individual account balances.
The above are the most common errors that occur due to which the trial balance does not balance. However, this is not an exhaustive list and there are a variety of other factors due to which the mismatch occurs.
Just like in the case of the unadjusted trial balance, there is a possibility that the bookkeeper has made errors while making those adjusting entries or posting them to the adjusted trial balance. Despite these errors, the adjusted trial balance still balances. This could be due to a variety of factor as identified below:
- Error of omission: An adjusting entry for a transaction has been completely missed out.
- Principle error: A adjusting entry has been incorrectly journalized and the wrong account has been used. For instance, service revenue account instead of an unearned revenue account.
- Error of original entry: Both the debit and credit amounts of the adjusting entry have been overstated. Another situation exists where both the debit and credit amounts of the adjusting entry have been understated.
- Error of reversal: When the amounts are correct, but the account that should have been debited has been credited and the account that should have been credited has debited.
- Commission error: An incorrect account has been debited or credit. This is same as principle error in its nature. Principle error occurs due to a lack of accounting knowledge whereas a commission error occurs due to mistake or oversight.
- Duplication in the listing of multiple of the individual account balances.
Therefore, it is safe to say that when an adjusted trial balance is balanced, an error might or might not exist. If the adjusted trial balance does not balance, an error most unquestionably exists.
Adjusted Trial Balance Example
Continuing with the books of Bob and his company, the next step for his bookkeeper after preparing the adjusting entries would be to prepare an adjusted trial balance. He could use either of the two methods earlier mentioned to create this report. The trial balance prepared under the simpler method of adding the adjustment amounts to the accounts should look something like this:
The highlighted account names are the ones that have changed due to adjusting entries being created for them at the end of the accounting period. Additional account names such as depreciation expense, prepaid rent, accrued expenses, unearned income and accumulated depreciation can be seen added in the order they would normally appear on the balance sheet.
The next step in the flow of the accounting cycle is the creation of financial statements which is one of the main reasons a company undergoes the painstaking process. The financial statements are a great tool for both the internal management and third parties to determine the financial performance or position of a company.