The key tools in the accounting process that ensure all the financial records of the company can be correct and balanced are trial balance and adjusted trial balance.
These statements check not only the accuracy of recorded transactions but also set the foundation for preparing financial statements like the income statement and balance sheet.
This article will take you step by step through the preparation of both a trial balance and an adjusted trial balance, focusing on the purpose, format, and steps to prepare both accounts.
What is a Trial Balance?
A trial balance is a report that summarizes all ledger accounts with either their debit or credit balances at any given time.
The foremost objective of preparing a trial balance is to verify that total debits equal total credits so that mathematical mistakes in the ledger may be detected.
Objective of Trial Balance
• To verify whether or not bookkeeping entries are correct.
• To catch any mistakes in journal entries or postings to the ledger.
• To be a beginning point to prepare financial statements.
Format of a Trial Balance
A trial balance generally consists of three columns:
Account Name: It comprises all the names of the ledger accounts. Like cash, accounts receivable, equipment, etc.
Debit: Comprises the debit side balance for each account.
Credit: Comprises the credit side balance for each account.
If there were no errors in the ledger, then the total of the debit column would equal the total of the credit column.
Preparing a Trial Balance Steps
Step 1: Record Journal Entries
All transactions are recorded first in the general journal with the proper debit and credit amount for each transaction.
Step 2: Post to the Ledger
Post journal entries to the right general ledger accounts, so that for each transaction, debit and credit sides have correctly posted.
Step 3: Calculate Each Account’s Ending Balance
Balance each ledger account by adding debits and credits and find out whether that balance is on the debit side or credit side.
Step 4: List Each Account and Its Balance in the Trial Balance
List all the ledger accounts with their final debit/credit balance on the trial balance.
Step 5: Sum the Columns Debit and Credit
Sum the debit column and the credit column. If it balances, the journal entries are accurate, and you are done preparing the trial balance. If it does not balance, check the journal entries as well as the ledger postings for mistakes.
Common Errors Identified by the Trial Balance
While a trial balance is a relatively simple tool for hunting for certain types of errors, it’s certainly not infallible. Here’s a list of common errors the trial balance may identify:
Arithmetic Errors
Arithmetic mistakes contained in simple additions or subtractions in journal or ledger entries.
Double Posting
Reckoning the same transaction twice.
Single-Side Posting: Posting only one side of a transaction, either the debit or the credit.
A trial balance cannot identify errors where:
• Debit and credit entries are both erroneous.
• An entire transaction was entirely absent.
• Amounts were wrong on both sides of debit and credit.
What is Adjusted Trial Balance?
An adjusted trial balance is prepared after making adjusting entries at the end of the accounting period. The accrual basis of accounting requires a need to make adjusting entries so that books of the company will be brought into congruence. Adjusting entries ensure revenues and expenses are properly recognized in the appropriate period. Adjusted trial balances enable preparation of correct financial statements.
Adjusted Trial Balance Purpose
• Accurate recording of all financial activity for the period.
• To prepare a condensed statement of all accounts after adjustments, which shall form the basis for financial statements.
How to Prepare Adjusted Trial Balance
Step 1: Recording Adjusting Entries
Adjusting entries are made to recognize accruals and deferrals, which include the recognition of accrued expenses and prepaid expenses, depreciation, and unearned revenues. The entries are entered in the general journal.
Step 2: Posting Adjusting Entries to the Ledger
But transfer the adjusting entries to various accounts of the ledger and carry out respective adjustments of the account balance.
Step 3: List of Accounts with New Balance in Adjusted Trial Balance
After making all adjustments posted, get another trial balance wherein all accounts are listed with their updated balance. This is referred to as adjusted trial balance.
Step 4: Verify that Debits Equal Credits
Summarize the debit and credit columns of your adjusted trial balance. They should be equal; if they’re not, check your adjusting entries and ledger postings for errors.
Example of Trial Balance and Adjusted Trial Balance
Suppose a business has the following revenues and expenses and adjustments in a given month:
Pre-Adjusting Trial Balance
|
Account Name |
Debit ($) |
Credit ($) |
|
Cash |
10,000 |
|
|
Accounts Receivable |
5,000 |
|
|
Equipment |
8,000 |
|
|
Accounts Payable |
3,000 |
|
|
Capital |
20,000 |
|
|
Revenue |
10,000 |
|
|
Rent Expense |
2,000 |
|
|
Salaries Expense |
3,000 |
|
|
Total |
28,000 |
33,000 |
This trial balance is not balanced. Upon investigation, it is found that the company had left out a debit of $5,000 in the Rent Expense account.
Adjusted Trial Balance (After Adjustments)
|
Account Name |
Debit ($) |
Credit ($) |
|
Cash |
10,000 |
|
|
Accounts Receivable |
5,000 |
|
|
Equipment |
8,000 |
|
|
Accounts Payable |
3,000 |
|
|
Capital |
20,000 |
|
|
Revenue |
10,000 |
|
|
Rent Expense |
7,000 |
|
|
Salaries Expense |
3,000 |
|
|
Total |
33,000 |
33,000 |
After adjustment, the adjusted trial balance is balanced, and it becomes a reliable basis for preparing financial statements.
Conclusion
The accounting cycle prepares the trial balance and the adjusted trial balance.
The trial balance is basically a check to ensure that debits equal credits whereas the adjusted trial balance summarizes the company’s financial situation after all necessary period-end adjustments.
These three steps help to establish good records of finances for meaningful preparation of financial statements.