Farwah Jafri | November 16 2022
Before the advent of accounting software, all the financial statements and accounting tasks were managed manually. The process was called the accounting cycle.
The most vital component of an accounting cycle is a trial balance. It is the document that has all of the financial information of a business compiled in one place. All the other financial statements are made from the information in a trial balance. A trial balance needs to be adjusted as it is used to summarize the current balances present in the general ledger.
Read along to find out what is an adjusted trial balance.
An adjusted trial balance is the one that has the account balances from the general ledger after the adjustments.
These adjustments can be for accrued expenses, prepaid expenses, and even non-cash expenses such as depreciation.
Trial balance is prepared by the end of the financial year, i.e., the end of the accounting period. It’s available on the business’s financial statements. The trial balance to income statement provides all the information regarding the business’s profit and losses, expenses, and cash flow.
The main purpose of creating a trial balance and, later on, adjusting it is to ensure that the financial statements are error-free and up-to-date. The trial balance ensures that the entries are hundred percent correct and updated. All the errors are rectified so that the statements are in compatibility with the desired accounting framework.
The adjusted trial balance analyzes the end-of-period business operations. It is needed for closing entries, especially when the temporary accounts need to be transferred to permanent accounts.
An adjusted trial balance can be prepared by creating journal entries about transactions that have not been completed.
These journal entries can be about prepaid expenses, payroll expenses, and depreciation. Have a look at these steps:
Step 1: Create An Unadjusted Trial Balance
Add journal entries as it is in the general ledger accounts. This will provide a summary of the transactions of the business prior to any kind of adjustment entries.
Step 2: Make Adjusting Entries
In this step, trial balance entries are adjusted, such as the depreciation expense, interest, payroll accrual, and other kinds of prepayments.
Step 3: Compile An Adjusted Trial Balance
You have to ensure that all the entries posted in the trial balance are correct as compared to the initial journal entries. Compare the final entries with the unadjusted ones to ensure they are accurately balanced.
Once you have cross-checked the transactional entries and confirmed that the final total is correct, you need to make the adjusting entries in the trial balance.
Adjusting entries are the ones that ensure that the business statements will contain all the relevant information for a particular accounting period.
There are four kinds of adjusting entries used in a trial balance. They are:
These entries make sure that all the business statements that are being prepared are in context with future expenses and payments. For example, the rent that you owe to the landlord in the future but is still unpaid.
These are the adjusting entries that do not belong to the accounting period for which the financial statement is being created. For example, a deferral entry will be of any kind of advance payment which will be received from the customer.
o Tax Adjustments
These entries help you accurately account for the amount of taxes deductions.
o Missed Transactions
These adjusting entries are for the transactions which might have been left out or missed while compiling the books.
The adjusted trial balance is not a part of the financial sheets. They are more like internal reports compiled for clarity. The main uses of are:
– It helps in the verification of the total of the debit side with the credit side. All the accounts are equalized to avoid any kind of error in the records.
– It is mainly used to construct the final financial statements such as balance sheets and income statements. It also plays a vital part in compiling the statement of cash flows.
Thanks to the latest technology, now trial balances can be easily adjusted and organized without going through the cumbersome task of adjusting them manually. Industrial software has made it easy to compile and prepare financial statements for accounting periods and especially at the end of the year.
You can explore software in the market and go for the one you find the best according to your preference. Software like AccountEdge Pro, ExCel, Sage 50cloud, and QuickBooks Desktop are a few that are popular options.
A lot of companies are opting for software as it helps in accurate reporting and time-saving. You do not have to spend hours adjusting the trial balance. All you have to do is check out the adjusted trial balance to have business insights.
The unadjusted and adjusted trial balance plays an immensely important role in ensuring that all the business accounts are perfectly balanced because the financial statements reflect the accurate total and final picture of the business.
You can go for industrial software to adjust trial balance entries. This will save you time as well as improve the efficiency of your business.
Read Also: A Simple Guide To Double Declining Balance Depreciation Method
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.