Accruing allows a company to recognize revenue when it is earned and expenses when they are incurred, thus aligning their reporting with the matching and revenue recognition principles required by GAAP. These principles require that revenue be recognized when it is earned and expenses when they are incurred. More practically, the adjusting entries allow the accounting books to more accurately reflect the activities that happened during the accounting period being reported. The main purpose of preparing an adjusted trial balance is to ensure that account balances accurately reflect changes made after the adjusting entries are posted. Before adjusting entries, the books do not accurately reflect the business activity during an accounting period. The first step in the preparation of an adjusted trial balance is to run the unadjusted trial balance.

Income Statement and Balance Sheet

If you check the adjusted trial balance for Printing Plus, you will see the same equal balance is present. A trial balance is an accounting statement that aggregates all ledger balances into equal debit and credit account column totals. A trial balance is prepared by a firm on a regular basis, generally at the conclusion of each reporting period. The fundamental goal of a trial balance is to ensure that the entries in a firm’s accounting system are mathematically correct.

Adjustments from unadjusted trial balance

The adjusting entries for the first 11 months of the year 2015 have already been made. Before posting any closing entries, you want to make sure that your trial balance reflects the most accurate information possible. It offers both on-site installation as well as cloud access, and is a good fit for growing businesses that are looking for accounting software that can grow with them. For instance, we expensed rent for the month, so we needed to reduce the prepaid rent amount.

5 Prepare Financial Statements Using the Adjusted Trial Balance

For example, Interest Receivable is an adjusted account that hasa final balance of $140 on the debit side. This balance istransferred to the Interest Receivable account in the debit columnon the adjusted trial balance. AccumulatedDepreciation–Equipment ($75), Salaries Payable ($1,500), UnearnedRevenue ($3,400), Service Revenue ($10,100), and Interest Revenue($140) all have credit final balances in their T-accounts. Thesecredit balances would transfer to the credit column on the adjustedtrial balance. As with the unadjusted trial balance, transferring informationfrom T-accounts to the adjusted trial balance requiresconsideration of the final balance in each account.

Examples of Adjusted Trial Balances

The adjusted trial balance is used to prepare the income statement and the balance sheet. Adjusting entries typically affect one income statement (revenue or expense) and one balance sheet (asset or liability) account. Once the adjustments are made, the information in the accounts will reflect the actual activity during that accounting period. It can thus be used to create the income statement and balance sheet with accurate information that complies with GAAP. Service Revenue had a $9,500 credit balance in the trial balancecolumn, and a $600 credit balance in the Adjustments column.

Best accounting software for preparing an adjusted trial balance

For example, if you owe employees Rs 900 and have yet to pay them, you would deduct Rs 900 from salary expense and credit Rs 900 from salaries payable to represent the expense and liability you owe. If you earned Rs 100 in interest on a bond, you would debit interest receivable for Rs 100 and credit interest revenue for Rs 100 to show the Rs 100 you have coming in, or receivable, and the Rs 100 you have earned. An interesting fact is that this approach is used by companies that employ manual accounting to balance their transactions from account to account. In the end, accounting software came as a saviour and the double-entry bookkeeping system became the knight in the shining armour for the accountants.

1. Ifyou check the adjusted trial balance for Printing Plus, you willsee the same equal balance is present.
2. Even if debits and credits balance out, it is still possible that mistakes were made.
3. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

Quick Points of Differences Between Trial Balance and an Adjusted Trial Balance

An adjusted trial balance can also refer to a trial balance where the account balances are adjusted by the external auditors. A trial balance only contains ending balances of your accounting accounts, elasticity of demand and its types while the general ledger has detailed transactions of the accounts. Notice the middle column lists the balance of the accounts with a debit balance, while the right column has balances for credits.

The salon had previouslyused cash basis accounting to prepare its financial records but nowconsiders switching to an accrual basis method. You have beentasked with determining if this transition is appropriate. After the adjusted trial balance is complete, we next preparethe company’s financial statements. Each month, you prepare a trial balance showing your company’s position.

After we post the adjusting entries, it is necessary to check our work and prepare an adjusted trial balance. There are five sets of columns, each set having a column fordebit and credit, for a total of 10 columns. The five column setsare the trial balance, adjustments, adjusted trial balance, incomestatement, and the balance sheet. After a company posts itsday-to-day journal entries, it can begin transferring thatinformation to the trial balance columns of the 10-columnworksheet.

Unearned revenue had a credit balance of $4,000 in the trialbalance column, and a debit adjustment of $600 in the adjustmentcolumn. Remember that adding debits and credits is like addingpositive and negative numbers. This means the $600 debit issubtracted from the $4,000 credit to get a credit balance of $3,400that is translated to the adjusted trial balance column. The statement of retained earnings always leads with beginningretained earnings. Beginning retained earnings carry over from theprevious period’s ending retained earnings balance. Since this isthe first month of business for Printing Plus, there is nobeginning retained earnings balance.

These examples will show you how to adjust an unadjusted trial balance looks like. The next step of accounting cycle is the preparation of closing entries. The format of an adjusted trial balance is same as that of unadjusted trial balance.

That is because they juststarted business this month and have no beginning retained earningsbalance. If we go back and look at the trial balance for PrintingPlus, we see that the trial balance shows debits and credits equalto $34,000. Looking at the asset section of the balance sheet, AccumulatedDepreciation–Equipment is included as a contra asset account toequipment. The accumulated depreciation https://www.business-accounting.net/ ($75) is taken away fromthe original cost of the equipment ($3,500) to show the book valueof equipment ($3,425). The accounting equation is balanced, asshown on the balance sheet, because total assets equal $29,965 asdo the total liabilities and stockholders’ equity. Just like in an unadjusted trial balance, the total debits and credits in an adjusted trial balance must equal.

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. The next step is to record information in the adjusted trial balance columns. The adjustments total of $2,415 balances in the debit and credit columns.

Deferred revenue is “earned” upon delivery of goods or services to customers. So, we can say that trial balance is an important part of the double-entry bookkeeping system. If you use accounting software, this usually means you’ve made a mistake inputting information into the system. Double-entry accounting (or double-entry bookkeeping) tracks where your money comes from and where it’s going. For more about these and other accounting software options, check out our accounting software reviews. This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas.