Adjusted Trial Balance Definition
Adjusted Trial Balance of the company in the non-financial statement in which the list and the balances of the company’s all the accounts are presented after the adjusting journal entries are made at the year-end and those balances are then reported on respective financial statements.
In simple words, when accounts are prepared at the end of the accounting period, ledger balances are also required to be updated with relevant adjustments, which are results of the partial transaction, improper transactions, and transactions that were skipped. Such types of transactions are deposits, closing stocksClosing StocksClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level., depreciation, etc. Once all necessary adjustments are made, a new second trial balance is prepared to ensure that it is still balanced. This new trial balance is called the adjusted trial balance.
Its purpose is to be sure that the total amount of debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction. in the general ledger is equal to the total amount of credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. in the general ledger.
Entries in an Adjusted Trial Balance
#1 – Accrual of revenue that was earned but not yet recorded.
It arises when an asset is a sale, but the customer not yet billed for the same. Eg. Account receivableAccount ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet., accrued interest.
Accrued revenue A/C – Dr
Revenue A/C- Cr
#2 – Accrual of expenses that were incurred but not yet recorded.
It is an expense recorded in accounts before the payment is made. E.g., Interest payableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet., salaries, and wages payable.
Expense A/C- Dr
Expense payable- Cr
#3 – Prepayments
PrepaymentPrepaymentPaying off an expense or debt obligation before the due date is referred to as prepayment. Companies frequently pay for expenses, goods, and services in advance to reduce their financial burden and gain monetary rewards. Prepaid bills, rent, salary, credit card bills, income tax, and sales tax are all examples of prepayment. is the setting of payment before its due date. Eg. Prepaid rent.
Prepaid expense A/C- Dr
Cash A/C- Cr
#4 – Depreciation
Depreciation is a non-cash expense that is identified to account for the deterioration of fixed assets to reflect the reduction in useful economic life.
Adjusted Trial Balance Example
To understand this better let us see the examples
Suppose a printing company name ACE Prints run a small business of printing, their trial balance as on 31st March’2018 is below:-
We get clear information from trial balance about debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. entries and credit entries. But there is some more information which is required for adjustment of trial balance.
- The salary due to the employee as on 31st March’2018=$ 50,000
- Rent is inclusive of refundable deposit of= $ 20,000
Now, the adjustments need to be done in the trial balance for the above details.
The below entry is done in the Salary account.
Here, the adjustment will be made of $ 80,000.00 as the total salary payableSalary PayableSalary payable refers to the liability of the company towards its employees against the amount of salary of a period that became due but has not been paid yet to them by the company and it is shown in the balance of the company under the head liability. is $ 80,000.
The below entry is done in the Rent account.
Here, the adjustment will be made of $ 50,000.00 as the rent deposit is $ 20,000, the rent payment will be $ 30,000.
The adjusted trial balance will be as follows:-
The adjustments are made as below:-
- A rent deposit is taken into consideration.
- An outstanding salary also included in it.
Hence, the trial balance made includes all considerable adjustments, and this is termed as adjustment trial balance.
How to Prepare Adjusted Trial Balance?
There are two methods for the preparation –
- The method first is similar to the preparation of an unadjusted trial balanceUnadjusted Trial BalanceAn unadjusted trial balance is the account balances reported directly from the general ledger without adjusting for the year-end journal entries. It acts as a starting point for analyzing account balances and adjusting entries.. The ledger accounts are adjusted for the end of periods adjusting entries, and the account balance is listed to prepare an adjusted trial balance. This method takes a lot of time, but it is very systematic and usually used by large companies where a lot of adjustments need to made by companies in their ledger accountsLedger AccountsLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. .
- The second method is quite fast and straightforward, but it is not very systematic and usually used by small companies where less adjustment needs to be done. In this adjustment, entries are directly added to the unadjusted trial balance to convert it to an adjusted trial balance.
- The primary purpose of the adjusted trial balance is a document that shows the total amount of debt against the total amount of credit. It is not considered as a financial statementAs A Financial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. because it is only used as an internal document.
- Hence, it is beneficial in big companies to adjust many entries. It also ensures that entries are done correctly if balances entered into financial statements are incorrect, the financial statements themselves will be inaccurate, and the total must be equal.
- Any difference indicates that there is some error in entries, ledger, or the calculations. It also helps to monitor the performance of the company as the adjusted trial balance is prepared after considering all adjustments of entries of different accounts. So it gives a clear picture of the performance of the company.
Difference Between Trial Balance and Adjusted Trial Balance
- A trial balance is prepared first, whereas adjusted trial prepared post-trial balance. Trial balance excludes entries like accrued expenseLike Accrued ExpenseAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited., accrued revenue, prepayment, and depreciation, whereas adjusted trial balance includes the same.
- A trial balance is a list of closing balances of ledger account on a particular point of time. In contrast, adjusted balance is a list of general accountGeneral AccountGeneral Account is a deposit account where an insurance company puts all its premiums collected from the policies it underwrites. This is used to fund the company’s operating expenses and the payment of several insurance claims & benefits. and their balances at a point of time after the adjusting entries have been posted.
Adjusted Trial Balance Video
This article has been a guide to what is Adjusted Trial Balance? Here we discuss adjusted trial balance examples, its preparation, and purpose along with journal entries. You may learn more about accounting from the following articles –