The Adjusting Process And Related Entries

If the debit and credit columns equal each other, it means the
expenses equal the revenues. This would happen if a company broke
even, meaning the company did not make or lose any money. If there
is a difference between the two numbers, that difference is the
amount of net income, or net loss, the company has earned. The adjusted trial balance (as well as the unadjusted trial balance) must have the total amount of the debit balances equal to the total amount of credit balances.

These adjustments typically include those for prepaid and accrued expenses, as well as non-cash expenses like depreciation. Such uniformity guarantees that there are no unequal debits and credits that have been incorrectly entered during the double entry recording process. However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes.

How to prepare an adjusted trial balance?

Some of the company’s accounts will need to have an adjusting entry made. One of those steps involves something called an adjusted trial balance. The adjusted trial balance is a report that lists all the accounts of a company and their balances after adjustments have been made.

• To exemplify the procedure of preparing an adjusted trial balance, we shall take an unadjusted trial balance and convert the same into an adjusted trial balance by incorporating some adjusting entries into it.
• In a dual entry accounting system, entries are made in debit and credit columns.
• The second two columns show the adjustments that have been made to a few accounts.
• For depreciation, depreciation expense increased, while accumulated depreciation increased as well.
• Not only
  did this negatively impact Celadon
  Group’s stock price and lead to criminal
  investigations, but investors and lenders were left to wonder what
  might happen to their investment.

The appropriate end-of-period adjusting entry establishes the Prepaid Expense account with a debit for the amount relating to future periods. The offsetting credit reduces the expense to an amount equal to the amount consumed during the period. Note that Insurance Expense and Prepaid Insurance accounts have identical balances at December 31 under either approach. The trial balance is a part of a company’s internal records used to prepare the financial statements. It gets its information from the balances reported in the general ledger accounts. Usually, the trial balance includes both income statement and balance sheet items.

Balance Sheet

The second method is simple and fast but less systematic and is usually used by small companies where only a few adjusting entries are found at the end of accounting period. In this method, the adjusting entries are directly incorporated to the unadjusted trial balance to convert it to an adjusted trial balance. Presentation differences are most noticeable between the two
forms of GAAP in the Balance Sheet. Under US GAAP there is no
specific requirement on how accounts should be presented.

In
Completing the Accounting Cycle, we continue our discussion
of the accounting cycle, completing the last steps of journalizing
and posting closing entries and preparing a post-closing trial
balance. You will not see a similarity between the 10-column worksheet
and the balance sheet, because the 10-column worksheet is
categorizing all accounts by the type of balance they have, debit
or credit. Take a couple of minutes and fill in the income statement and
balance sheet columns.

Adjusted Trial Balance Example

Once all accounts have balances in the adjusted trial
balance columns, add the debits and credits to make sure they are
equal. If
you check the adjusted trial balance for Printing Plus, bookkeeping for startups you will
see the same equal balance is present. An adjusted trial balance is created after all adjusting entries have been posted into the appropriate general ledger account.

• In
  Completing the Accounting Cycle, we continue our discussion
  of the accounting cycle, completing the last steps of journalizing
  and posting closing entries and preparing a post-closing trial
  balance.
• This report is used to ensure that the total of the debit column and credit column in the trial balance matches.
• The highlighted account names are the ones that have changed due to adjusting entries being created for them at the end of the accounting period.
• To get that balance, you take
  the beginning retained earnings balance + net income – dividends.
• From this
  information, the company will begin constructing each of the
  statements, beginning with the income statement.

To prove the quality of the total debit and credit balances, accountants prepare an adjusted trial balance. If you have to prepare one and don’t know where to start, we’ll share a few basics in this article to help you out. Usually, companies prepare the trial balance at the end of each fiscal period. At that point, it only includes balances from the general ledgers, as stated above.

What is the purpose of preparing a trial balance?

I know, the concept can be a little confusing, so let’s dive a little deeper into it and figure it all out. Ensuring the adjusted trial balance report is presented in a clear, organized way will make it easier for you when it comes to preparing your financial statements at the end of the year. There are many types of software to explore, which can be used to prepare an adjusted trial balance.