Definition:
The adjusted trial balance is the statement that lists down all the closed account ledgers after making all of the adjustments. This is the final trial balance that use to prepare the financial statements. This statement is sometimes printed out with the financial statements and sometimes is not. It depends on the company’s practice.
At the end of each accounting period, the accountant typically produces the financial statements for relevant stakeholder usage.
And to ensure that financial transactions are arithmetically recorded, the trial balance is prepared.
In most cases, we use only one template to prepare the trial balance by including both the unadjusted and adjusted trial balance.
Sometimes it is prepared separately. Before drafting or preparing the financial statements, it is good to have an overall review of the trial balance. This is to ensure that the items’ numbers are consistent with our understanding.
Explanation:
There are many reasons accountants need to make adjustments in the unadjusted trial balance to make the final one called adjusted trial balance.
Those adjustments could be accrual expenses, prepayments, and other non-cash transactions. Sometimes, it is required by auditors as the result of their auditing.
The adjusted trial balance is almost the same as the unadjusted trial balance. Sometimes, these two reports are prepared by combining into one report by showing unadjusted and adjusted balances. And sometimes, it prepares separately.
The key information included in this report is the company’s name, the name of the statement: the trial balance, and the accounting period.
It is prepared in four or five columns, and information included in the column is the account name, reference, debit balance, and credit balance.
The closed account ledgers listed in this report normally range from assets accounts to liabilities, equity, and revenues and expenses accounts.
This is to help the preparer of financial statements easily identify which items belong to which class of accounts.
In the accounting equation, asset items are in debt, and liabilities and equities are on the credit side. Revenues items are recorded on the credit side of the trial balance, and expense items are recorded on the debit side.
Example:
The following is an example of an adjusted trial balance:
Why does the Trial Balance Need to Be Adjusted?
There are number of reasons the company needs to make the adjustment to the trial balance and mostly it happens when the company closes the book or financial statements at the end of the period/year.
Here are the main reasons why TB needs to be adjusted.
- Unrecorded adjusting entries: Adjustments must be made to post transactions that have not been previously recorded.
- Depreciation: Assets gradually lose their value over time and must be reflected in the trial balance through periodic adjustments for depreciation.
- Accrued expenses: The amount of expenses incurred but not yet paid for should be included in the trial balance with an adjustment entry.
- Accrued revenues: revenues that were earned but not received by the company should be adjusted on the trial balance.
- Bad debts: A certain percentage of customer receivables should be recognized as uncollectible and are therefore written off, creating an adjustment to the trial balance.
- Prepaid assets: An asset that was prepaid before being used, such as insurance or rent, would require to reflect its current value within the trial balance accurately the trial balance.
- Inventory discrepancies: Due to errors or other discrepancies, inventory levels may need to be adjusted on the trial balance to ensure the accuracy of financial statements.
- Other management adjustments: The management of the company might, at the end of the period, note or identify that certain account balances or transactions might need to be adjusted by the accounting standard that it is preparing to reflect the actual economy of those accounts.
- Audit adjustment: Th company appoints an auditor to audit its financial statements, and the auditor might identify a certain error during the audit and then propose adjustments.
