Preparing an Adjusted Trial Balance: A Guide

The balance sheet is the third statement prepared after the statement of retained earnings and lists what the organization owns (assets), what it owes (liabilities), and what the shareholders control (equity) on a specific date. Remember that the balance sheet represents the accounting equation, where assets equal liabilities plus stockholders’ equity. When the accounting system creates the initial report, it is considered an unadjusted trial balance because no adjustments have been made to the chart of accounts. This is simply a list of all the account balances straight out of the accounting system.

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. 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.

How to prepare an adjusted trial balance

Adjusted trial balance can be used directly in the preparation of the statement of changes in stockholders’ equity, income statement and the balance sheet. However it does not provide enough information for the preparation of the statement of cash flows. The adjusted trial balance is the key point to ensure all debits and credits are in the general ledger accounts balance before information is transferred to financial statements. Budgeting for employee salaries, revenue expectations, sales prices, expense reductions, and long-term growth strategies are all impacted by what is provided on the financial statements. 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.

That is because they juststarted business this month and have no beginning retained earningsbalance. Total revenues are $10,240, while total expenses are $5,575.Total expenses are subtracted from total revenues to get a netincome of $4,665. If total expenses were more than total revenues,Printing Plus would have a net loss rather than a net income.

Overview: What is an adjusted trial balance in accounting?

The second account that needs attention is the prepaid rent account. At the beginning of the year, the company paid 6 month’s rent on a storage warehouse that they use. Since the company produces quarterly financial statements, the time accounted for in each accounting period is 3 months. Jim knows that of the 6 month’s prepaid rent, the company has used up 3 months, or half, of the prepayment. When you prepare a balance sheet, you must first have the mostupdated retained earnings balance. To get that balance, you takethe beginning retained earnings balance + net income – dividends.If you look at the worksheet for Printing Plus, you will noticethere is no retained earnings account.

There is no need to do anything other than check that the balances match the adjustments made and the total debits match the total credits. Looking at the asset section of the balance sheet, AccumulatedDepreciation–Equipment is included as a contra asset account toequipment. The accumulated depreciation ($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.

Example of an Adjusted Trial Balance

Next you will take all of the figures in the adjusted trial balance columns and carry them over to either the income statement columns or the balance sheet columns. The trial balance information for Printing Plus is shown previously. adjusted trial balance example If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000. Presentation differences are most noticeable between the two forms of GAAP in the Balance Sheet.

• Before preparing the financial statements, an adjusted trial balance is prepared to make sure total debits still equal total credits after adjusting entries have been recorded and posted.
• One of those steps involves something called an adjusted trial balance.
• The accumulated depreciation ($75) is taken away fromthe original cost of the equipment ($3,500) to show the book valueof equipment ($3,425).
• This gross misreporting misledinvestors and led to the removal of CeladonGroup from the New York Stock Exchange.
• Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities.
• The trial balance information for Printing Plus is shownpreviously.

No more time spent getting your reporting up to date, just time using those reports to understand your business. 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. 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. The second application of the adjusted trial balance has fallen into disuse, since computerized accounting systems automatically construct financial statements.

The adjustments total of $2,415 balances in the debit and creditcolumns. As you have learned, the adjusted trial balance is an importantstep in the accounting process. But outside of the accountingdepartment, why is the adjusted trial balance important to the restof the organization? An employee or customer may not immediatelysee the impact of the adjusted trial balance on his or herinvolvement with the company. The salon had previouslyused cash basis accounting to prepare its financial records but nowconsiders switching to an accrual basis method.