Adjusted trial balance example and explanation

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. There are also net changes for the period trial balance report that provides a good view of all changes made during an accounting period. To understand what how cash back credit cards work, we first have to view an unadjusted trial balance as well as the necessary journal entries to complete in order to prepare an adjusted trial balance. After the adjusted trial balance is complete, we next prepare
the company’s financial statements. The adjustments total of $2,415 balances in the debit and credit
columns. The accounting cycle is a multi-step process designed to convert all of your company’s raw financial information into usable financial statements.

  • These examples will show you how to adjust an unadjusted trial balance looks like.
  • When preparing an income statement, revenues will always come before expenses in the presentation.
  • This can result in a balance increasing when it should be decreasing leaving you with incorrect numbers at the end of an accounting period.
  • Before you balance your accounts, ensure sure you have a record of any money or asset transactions that enter and exit your accounts.

In the Printing Plus case, the credit side is the higher figure
at $10,240. This means
revenues exceed expenses, thus giving the company a net income. If
the debit column were larger, this would mean the expenses were
larger than revenues, leading to a net loss. You want to calculate
the net income and enter it onto the worksheet. The $4,665 net
income is found by taking the credit of $10,240 and subtracting the
debit of $5,575.

Adjusted trial balance: Definition, preparation and example

An adjusted trial balance lists the general ledger account balances after any adjustments have been made. These adjustments typically include those for prepaid and accrued expenses, as well as non-cash expenses like depreciation. Once all ledger accounts and their balances are recorded, the debit and credit columns on the trial balance are totaled to see if the figures in each column match each other.

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. Looking at the income statement columns, we see that all revenue
and expense accounts are listed in either the debit or credit
column. This is a reminder that the income statement itself does
not organize information into debits and credits, but we do use
this presentation on a 10-column worksheet.

As you see in step 6 of the accounting cycle, we create another trial balance that is adjusted (see The Adjustment Process). You may notice that dividends are included in our 10-column
worksheet balance sheet columns even though this account is not
included on a balance sheet. There is
actually a very good reason we put dividends in the balance sheet
columns. Take a couple of minutes and fill in the income statement and
balance sheet columns. Total expenses are subtracted from total revenues to get a net
income of $4,665. If total expenses were more than total revenues,
Printing Plus would have a net loss rather than a net income.

What does it mean to “adjust” a trial 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. 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.

Statement of Retained Earnings

When preparing an income statement, revenues will always come before expenses in the presentation. For Printing Plus, the following is its January 2019 Income Statement. 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. At the bottom of the table, the debit and credit columns are totaled. If the totals of the two columns do not match each other, it means that there is an error.

The Need of Preparing an Adjusted Trial Balance

Although an adjusted trial balance is not often included in a company’s financial statements, accountants use it to keep track of all financial activities in one spot. They also make modifications to the trial balance to ensure that just one accounting cycle’s worth of data is included. Preparing an adjusted trial balance is the sixth step in the accounting cycle. An adjusted trial balance is prepared by creating a series of journal entries that are designed to account for any transactions that have not yet been completed.

Once all the accounts are posted, you have to check to see whether it is in balance. You could also take the unadjusted trial balance and simply add the adjustments to the accounts that have been changed. In many ways this is faster for smaller companies because very few accounts will need to be altered. As with all financial reports, trial balances are always prepared with a heading. Typically, the heading consists of three lines containing the company name, name of the trial balance, and date of the reporting period.

Now that the trial balance is made, it can be posted to the accounting worksheet and the financial statements can be prepared. It’s time to make adjusting entries once you’ve double-checked that you’ve properly entered your debit and credit entries transactions and that the account totals are right. As computerised accounting systems automatically create financial statements, the second use of the adjusted trial balance has gone out of favour.

One of the most well-known financial schemes is that involving the companies Enron Corporation and Arthur Andersen. Enron defrauded thousands by intentionally inflating revenues that did not exist. Arthur Andersen was the auditing firm in charge of independently verifying the accuracy of Enron’s financial statements and disclosures. This meant they would review statements to make sure they aligned with GAAP principles, assumptions, and concepts, among other things.

The Importance of Accurate Financial Statements

For Printing Plus, the following is its January 2019
Income Statement. At this point you might be wondering what the big deal is with trial balances. Did we really go through all that trouble just to make sure that all of the debits and credits in your books balance? The adjusted trial balance is what you get when you take all of the adjusting entries from the previous step and apply them to the unadjusted trial balance. It should look exactly like your unadjusted trial balance, save for any deferrals, accruals, missing transactions or tax adjustments you made.