Unadjusted Trial Balance

Unadjusted Trial Balance Definition

An 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 making adjusting entries.

These year-end adjusting entries are considered necessary to make an Adjusted Trial Balance and include passing adjusting journal entries which include entries namely:

  • Receivables that do not apply to the period for which Accounting records are to be prepared.
  • Accrued Expenses /Interest related
  • Prepaid Income/Expenses items
  • Money received for work that is to be done in another accounting period. For example, Advance payments from clients, and Subscription received etc.
  • Payments made for periods other than the period for which accounting records are being prepared. For example, Insurance Premium etc.

How is it helpful?

Unadjusted Trial Balance is a direct report extracted by a business from its Double Entry Accounting system. It includes various payments received/made by the business which is not related to the accounting period for which financial statements are to be prepared and as such needs to be adjusted to provide a correct picture of the business performance for the period for which financial statements are prepared. Also, it helps verify the balance of debits and credits which is further reviewed by checking the balance of each account to prepare Adjusting entries as part of the Accounting cycle process which begins when a transaction occurs and concludes with its inclusion in the financial statements.

Passing of adjusting entries to make an Unadjusted Trial Balance into an Adjusted Trial Balance is the final step after which Financial Statements are prepared, and it is important that the correct Adjusting entries were done which will ultimately result in the preparation of correct Financial Statements. 

Unadjusted Trial Balance Example

ABC Company records its journal entries and posts them to ledger Accounts. Below is the Unadjusted Trial Balance as on Dec 31, 2017

unadjusted trial balance

  • Rent Expense includes payment of $ 1200 for January 2018
  • Utility Expense bill of $ 8000 is due in January 2018

Adjusting entries to be passed to adjust the above two expenses are as follows:

  • Rent Expense

unadjusted trial balance 1

  • Utility Expense

unadjusted trial balance 2

Thereafter, Adjusting Entries will be passed in the relevant accounts to prepare Adjusted Trial Balance which is the last step before Financial Statements are produced.

 Use of Unadjusted Trial Balance

  •  The primary purpose is for finding out the errors and mistakes that occurred at the time of the bookkeeping process.
  • It also the base to find occurred errors for any of the reasons below,
    • Errors of Omission
    • Error of Commission
    • Error of Principle
    • Compensating errors

Advantages

  • It can be used as a tool to evaluate the internal control of the business accounting system.
  • It will be acting as a base for finding the errors and posting adjustment entries by the skilled persons.
  • It will also be a base for the preparation of financial statements after proper adjustment entries.
  • It also supports for the audit team to prepare a proper audit program based on the capacity of accountants.

Disadvantages

  • It cannot be a base for any references to prepare the final reports of the company without further adjustments.
  • Possibilities of errors may be high in the unadjusted trial balance as the works have been done with the primary data.
  • Passing the adjustment entries will be based on the identification of errors in the books.
  • High knowledge required by the accountant under accounting standards and applicable GAAP to post the adjusting entries.

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