An unadjusted trial balance is usually the third step in the accounting cycle and is prepared before any adjusting entries are made. It is a report that lists the balances of all the individual t-accounts of the general ledger at a specific point in time. This is perhaps one of the simplest steps of the accounting cycle as it just requires the bookkeeper to compile the separate balances in one report.
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 (you are here)
- Adjusting Entries
- Adjusted Trial Balance
- 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.
Unadjusted Trial Balance Purpose
The unadjusted trial balance serves the following purposes:
- Detection of any errors: The totals of debit column will not match the total of credit column if there has been an error in recording or posting any journal entry up till this point.
- Management use: It is usually used internally and is not for official distribution outside the company. The company can use this report to evaluate at a high level the financial position of a company. It will help address some questions like how much cash is available, the situation with debtors and creditors, total expenses paid etc.
In its initial form, this report will not be suitable to be used for preparing the financial statements like Income statement or Balance sheet as it won’t comply with the accounting standard frameworks like US GAAP or IFRS.
This trial balance will be prepared once again after all adjusting entries have been posted and then that report will be called an adjusted trial balance. Therefore, the unadjusted trial balance will serve as a foundation upon which the rest of the steps of the accounting cycle will take place.
Unadjusted Trial Balance Preparation
The unadjusted trial balance has three columns:
- Account names in the first column
- Debit balances as the second column
- Credit balances as the third column
It is a common practice to list the account names in the order they appear on the general ledger of by their respective account numbers. Most accounts are numbered in the order they are displayed on the balance sheet. This means that assets accounts would come first, followed by liabilities and equity accounts and then ending with the revenues and expenses accounts.
The total of the debit and credit columns is reflected at the bottom of the trial balance. Both the total should match as is the case with an accounting equation. If they do not match, this implies that either the unadjusted trial balance has been incorrectly prepared, the journal entries were wrongly made, or the journal entries were posted erroneously.
The unadjusted trial balance should always be given a proper heading. This usually consists of the company name in the first line, the name of the trial balance in the second and the reporting period date in the third. The format for the proper heading is given below:
Unadjusted Trial Balance
January 21, 2020
Unadjusted Trial Balance Errors
Does Not Balance
If the totals of debit and credit columns of the unadjusted 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 unadjusted 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 which could result in a mismatch.
There can be a situation where the bookkeeper has made errors in either of the preceding steps of the accounting cycle, but the unadjusted trial balance still balances. This could be due to a variety of factor as identified below:
- Error of omission: A journal entry for a transaction has been completely missed out on.
- Principle error: A transaction has been incorrectly journalized. For instance, a payment of rent could have treated as a payment for office supplies.
- Error of original entry: Both the debit and credit amounts of the journal entry have been overstated. Another situation exists where both the debit and credit amounts of the journal 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.
So the quick rule of thumb here is:
- If the trial balance does not balance, there is definitely an error somewhere
- If the trial balance does balance, an error might still exist but it wouldn’t be quite so obvious as an unbalance
Unadjusted Trial Balance Example
Continuing with the books of Bob and his company, Bob’s Donut Shoppe, the next step for his bookkeeper after preparing the ledger accounts is to create an unadjusted trial balance. His unadjusted trial balance for the given period is given below:
As you can see, the totals of debit columns and credit columns balances. However, this still does not mean that an error could not exist. The bookkeeper should examine the accounts thoroughly again before proceeding to the next step of creating adjusting entries for the period.