Preparing an Adjusted Trial Balance: A Guide
Just like in the unadjusted trial balance, total debits and total credits should be equal. Utilities Expense and Utilities Payable did not have any balance in the unadjusted trial balance. After posting the above entries, they will now appear in the adjusted trial balance. Adjusting entries are all about making sure that your financial statements only contain information that is relevant to the particular period of time you’re interested in.
Step 1: Run an unadjusted trial balance
If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. This net income figure is used to prepare the statement of retained earnings. AccountEdge Pro total debt service includes an excellent selection of financial reports including a trial balance summary report and a trial balance detail report that provides details on all general ledger accounts currently being used. After posting the above entries, the values of some of the items in the unadjusted trial balance will change.
- When entering net income, it should be written in the column with the lower total.
- There are also net changes for the period trial balance report that provides a good view of all changes made during an accounting period.
- Enter Bench, America’s biggest bookkeeping service and trusted by small businesses in many different industries across the country.
- IFRS requires that accounts be classified into current and noncurrent categories for both assets and liabilities, but no specific presentation format is required.
5 Prepare Financial Statements Using the Adjusted Trial Balance
We’ll explain more about what an adjusted trial balance is, and what the difference is between a trial balance and an adjusted trial balance. The balance of Accounts Receivable is increased to $3,700, i.e. $3,400 unadjusted balance plus $300 adjustment. Service Revenue will now be $9,850 from the unadjusted balance of $9,550. Double-entry accounting (or double-entry bookkeeping) tracks where your money comes from and where it’s going. Before accounting software, people had to do all of their accounting manually, using something called the accounting cycle. Depreciation is a non-cash expense identified to account for the deterioration of fixed assets to reflect the reduction in useful economic life.
Financial Statements
Such types of transactions are deposits, Closing Stocks, depreciation, etc. Once all necessary adjustments are made, a new second trial balance is prepared to ensure that it is still balanced. Its purpose is to test the equality between debits and credits after adjusting entries are made, i.e., after account balances have been updated. An adjusted trial balance is a listing of all company accounts that will appear on the financial statements after year-end adjusting journal entries have been made. If you look in the balance sheet columns, we do have the new, up-to-date retained earnings, but it is spread out through two numbers.
What is an unadjusted trial balance?
There is also a similarity between the adjusted and unadjusted trial balance in which the total of debit balances must equal the total of credit balances in both types of trial balance. With an adjusted trial balance, necessary adjusting journal entries are incorporated in the trial balance. In the above example, unrecorded liability related to unpaid salaries and unrecorded revenue amount has been included in the adjusted trial balance. The above trial balance is a current summary of all of your general ledger accounts before any adjusting entries are made. We are using the same posting accounts as we did for the unadjusted trial balance just adding on. Notice how we start with the unadjusted trial balance in each account and add any debits on the left and any credits on the right.
If you’re using a dedicated bookkeeping system, all of this work is being done for you in the backend. It will create a ledger of all your transactions and turn them into financial statements for you. There is a worksheet approach a company may use to make sure end-of-period adjustments translate to the correct financial statements. Ending retained earnings information is taken from the statement of retained earnings, and asset, liability, and common stock information is taken from the adjusted trial balance as follows. An adjusted trial balance is prepared using the same format as that of an unadjusted trial balance. The above journal entries were made in order to account for depreciation expenses and prepaid rent.
Similar to the unadjusted trial balance, the total of debit balances must equal the total of credit balances in the adjusted trial balance. This is due to the company usually needs to make sure that the total balances on the debit side equal to those on the credit side before they make any necessary adjustments. In our detailed accounting cycle, we just finished step 5 preparing adjusting journal entries. We will use the same method of posting (ledger card or T-accounts) we used for step 3 as we are just updating the balances. Remember, you do not change your journal entries for posting — if you debit in an entry you debit when you post. After we post the adjusting entries, it is necessary to check our work and prepare an adjusted trial balance.
Convert Your Cash-Basis Books to Accrual at Tax Time
The second application of the adjusted trial balance has fallen into disuse, since computerized accounting systems automatically construct financial statements. However, it is the source document if you are manually compiling financial statements. In the latter case, the adjusted trial balance is critically important – financial statements cannot be constructed without it. Sage 50cloudaccounting offers both a summary and detailed trial balance report, along with a comparative trial balance that allows you to compare trial balance totals for two periods.
In this case we added a debit of $4,665 to the income statement column. This means we must add a credit of $4,665 to the balance sheet column. Once we add the $4,665 to the credit side of the balance sheet column, the two columns equal $30,140. The trial balance is at the heart of the accounting cycle—a multi-step process that takes in all of your business’ financial transactions, organizes them, and turns them into readable financial statements.
Once you’ve double checked that you’ve recorded your debit and credit entries transactions properly and confirmed the account totals are correct, it’s time to make adjusting entries. Adjusted trial balance records the account balances of an organization after adjusting the transaction to various expenses, including the depreciation amount, accrued expenses, payroll expenses, etc. This, in turn, gives businesses a clear picture of where they stand. This trial balance type allows businesses have a summarized view of all the account balances post-adjustment to respective expenditures.
Before posting any closing entries, you want to make sure that your trial balance reflects the most accurate information possible. Multi-period and departmental trial balance reports are available as well. Sage 50cloudaccounting offers three plans; Pro, which is $278.98 annually, Premium, which runs $431.95 annually, and Quantum, with pricing available from Sage.
Likewise, while the adjusted trial balance is used as the basis for the preparation of financial statements, the unadjusted trial balance usually cannot be used for such purpose. This is due to the total balances in the unadjusted trial balance are usually understated or overstated. Both the unadjusted trial balance and the adjusted trial balance play an important role in capital expenditures and other cash needs for a business ensuring that all of your accounts are in balance and financial statements will reflect the most accurate totals.
Beginning retained earnings carry over from the previous period’s ending retained earnings balance. Since this is the first month of business for Printing Plus, there is no beginning retained earnings balance. Notice the net income of $4,665 from the income statement is carried over to the statement of retained earnings. Dividends are taken away from the sum of beginning retained earnings and net income to get the ending retained earnings balance of $4,565 for January. This ending retained earnings balance is transferred to the balance sheet. The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time.
The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period. The statement of retained earnings is prepared before the balance sheet because the ending retained earnings amount is a required element of the balance sheet. The following is the Statement of Retained Earnings for Printing Plus. When it comes to the adjustment made, the adjusted trial balance sheet is left with information that is relevant for a particular period as per the information that the business organization seeks.