Trial balance normally lists down all closing account balances in debit and credit depending on the nature of accounts. For example, assets are posted in debit and liabilities are posted on the credit side of the trial balance.
Unadjusted trial balance list down all the closing balance before the adjustment and adjusted trial balance list down all closing accounts after making the adjustment.
Trial balance is prepare to assist accountant to detect double entries errors and assist accountant in prepare financial statements.
The following is the example of unadjusted and adjusted trial balance:
Example of adjusted trial balance:
Example of unadjusted trial balance:
These two statements are almost the same. It shows the company name, accounting period, account name, and the amount in debit or credit. The main difference is adjusted trial balance is already taken into account the adjustments while the unadjusted trial balance is not.
These two statements are sometimes required to print out along with the financial statements and sometimes not. Generally not require to print.
The adjusted and unadjusted trial balance format is not much different. It contains the same key information, including the name of the company, accounting period, account name, unadjusted balance, adjustment, and adjusted balance.
The only difference between these two statements is that the adjusted trial balance contains show the closing balance of accounts after adjustments and unadjusted trial balance is not.
Adjusted and unadjusted trial balance format in excel:
Unadjusted Trial Balance, Adjusted Trial Balance, Post-Closing Trial Balance
Preparing the trial balance is the initial works of the financial reporting process because these statements could assist the accountant in drafting the report easily and mathematically correct.
The following are the three simple steps that you can use to prepare BT at the end of the period for your organization.
In case you are using the accounting system to record your entity’s financial information, TB is already automatically prepared for you.
All you need to do is just extract it in the spreadsheet format and then start drafting financial statements.
But, understanding how this statement is prepared could help you a lot in adjustment entries, especially correction adjustment.
In this article, we will explain how to prepare trial balance manually in three simple steps:
Close all the General Ledger’s accounts that you have. This is the first thing you need to do.
For example, per your chart of accounts, you have 100 ledgers and all you need to do is to close all of those accounts.
Example, Salaries Expenses account is close and the total amount will use in the second step.
Closing the mean balancing the debit and credit amount of Salaries Expenses.
Salaries expenses that are initially recorded in the debit side in T account and the balancing amount would be on the credit side. This will then carry into the debit side of the trial balance.
Once you complete in closing all General Ledger, all you need to do is to transfer the carrying forward balance to trial balance. If the closing balance per general ledger is at Debit, then post in the credit of TB.
As per the example above, the assets items records in the top and then follow by liabilities, equities, revenues, and then expenses.
This structure could help both accountants and auditors who use TB to draft financial statements to easily identify which items are assets and which items are liabilities and so on.
Once you complete the movement from general ledger to trial balance, the next step you need to do is start reconciling the TB.
In this step, you need to reconcile the balance in credit and debit of your trial balance. If there is the difference between debit and credit, you need to double-check with the accounting entry in the general ledger.
The difference mainly because of inputting the difference amount of the same transactions in debit and credit. Duplicating and elimination would not make a difference.
This is the final stage of preparing the trial balance, and you can start drafting your financial statements.
However, you can scan through the entire TB to make sure that the numbers of items or accounts that present in the trial balance are the same with your understanding.
Just in case the mistakes occur since the entry in the ledgers, and you cannot detect at that time. The following are the examples of adjusted and unadjusted trial balance.
Example of unadjusted trial balance:
Example of adjusted trial balance:
In the last step of the accounting cycle, the accountant requires to prepare the post-closing trial balance. This statement is prepared after the accountant makes all necessary adjustments to the general ledger and the adjusted trial balance, and all the suspend accounts are closed.
It is important to note that the post-closing trial balance contains only balance items accounts. Income statement items are the temporary accounts and they are not included in the post-closing trial balance.
The primary purpose of preparing this post-closing trial balance is to ensure that all accounts are balanced and ready for recording the next period of financial transactions.
The main difference between post-closing trial balance and adjusted trial balance is that this statement contains the income statement accounts like revenues, expenses, and others gain or lost accounts.
The following info graphic and explanation will help you to have better understanding about this Post-closing trial balance.
As you can see, the accountant or bookkeeper first need to analyst the business transactions and then make the journal entries.
In this stage, the accountant might need to know the nature of transactions so that they could classify whether it is expenses, revenues, assets, or liabilities. Recording of those transactions should follow the role of debt and credit.
These journal entries are then posted into individual accounting ledgers in general ledgers. If the transaction affects the increase of assets, then it should be debit. If they are decreasing, then it should be recorded in credit.
All the financial transactions that occurred during the period need to records in the account ledger-based nature and by respecting to accounting principle as well as accounting standards that the entity is using. Two primary accounting standard is US GAAP and IFRS.
At the end of the period, all of the account ledgers need to close and then move to the unadjusted trial balance. This is to make sure that the entries that make to the account ledgers are correctly recorded.
The information in the unadjusted entries normally including company name, accounting period, account name, unadjusted amount, adjusting entries ( adjustment), and adjusting entries.
When the accountant reviews the ledger and unadjusted trial balance, some adjustments may require. All of the adjustments should be made to the ledgers and trial balance. Once the adjustments are completed, we then get the adjusted trial balance.
Once we get the adjusted trial balance, we then prepare the financial statements and all the suspend account need to be closed.
The last step of the accounting cycle is the post-closing trial balance. This trial balance is prepared at the end of each accounting period and forward to the opening balance of the next period. This trial balance normally doesn’t have zero accounts.
The entity’s financial statements are produced through analyzing and recordings the business transactions in many difference steps of accounting cycle.
Those including analyzing sales, purchases and others business transactions and then recording those transactions in monetary term into the key importance areas like journal entries, ledger accounts, trial balance and then draft the financial statements.
In the traditional accounting records, each areas like journal entries, ledgers, and trial balance are not integrate to each other and the recording and movement of accounting transactions from one book to others book must be done manually.
However, accounting records currently are performed by using accounting system where all of the books are integrated to each other.
For example, accountant or bookkeeper analyze and records the sales transaction into the journal entries and then this sales transactions will run automatically into ledger, trial balance, and then directly affect the financial statements.
Even though the accounting system make us ease to use and records the financial transaction, it is importance to have a good understanding about the accounting cycles that we can have the better understanding of how accounting system works and especially process the accounting information.
The following are the list of 8 steps accounting cycles that accountant or bookkeeper use to recording and preparing the entity’s financial statements:
8 Steps of Accounting Cycles:
1) Records the transaction in journal entries:
First step in accounting cycle is analyzing the business transactions and then records those transaction into journal entries. There are many business transactions occur in entity every day.
Some of those might need to records as financial information and some of those might be not. For example, the company memo issue for sales discount during the next holiday is not the accounting transactions. And this should not records in the accounting system.
However, sales transactions that entity made every day are the financial transactions and need to records in the monetary term in the accounting system. The journal entries for these sales transaction should records in the general journal.
For example, in the general journal, the entry should be credit sales and debit account receivable or cash depending on the nature of sales transactions.
All of the business transactions are analyzed and make the journal entries in the general journal. The journal entries will then need to transfer into the specific ledger accounts based on the nature of transactions.
For example, sales will need to transfer into sales ledger and account receivable will need to transfer into account receivable ledger.
2) Transfer the journal transactions into ledger accounts
The second step of accounting cycle is transferring the journal transactions from general journal into the ledger accounts or general ledger.
The transfer will help accountant or bookkeeper to get the total balance of each types of account. For example, all the sales journal that records in the general journal are transfer into sales ledgers.
These sales transactions will records in the credit side of the sales ledgers and when accountant balancing this ledger, he will get the total amount of sales during the period.
Sales as sales journal, others financial transaction that records in the general journal will transfer to the ledgers account and then closing those ledgers. The ledgers are closed, the total balance of each ledger will transfer into trial balance.
When transferring the journal entries into the ledgers accounts, debit and credit role will have to be follow. For example, assets are increasing in the debit side while liabilities and equities are increase in the credit side. The decrease of these accounts are moved in difference direction.
Revenues and expenses accounts are increase and decrease in the difference direction. Revenues increase in the credit side while expenses are increase in debit side like assets.
All of the sub-accounts of these financial statements element are increase or decrease in respect to the main element. For example, non-current assets and current assets are increase in the debit side and decrease in the credit side.
3) Preparing unadjusted trial balance:
Unadjusted trial balance are preparing after accountant close all the ledgers accounts at the end of the financial period. For example, the entity financial period end at 31 December. Accountant will closed the account ledger by cut off the transactions at the end of 31 December.
Once all of the account ledgers are closed, account the total amount of those ledgers account will need to move to trial balance. This trial balance is called unadjusted trial balance. This is because there is no adjustment is processed to the trial balance or ledger yet.
Trial balance is not the financial statements and the reason that we prepare this statement is because we want to check whether the debit and credit role are properly apply during journal and ledger accounts.
This statement also help to assess the mathematical correctness of financial statements. If Trial balance is not reconciled or the debit side and credit is not equal, the financial statements especially balance sheet is not equal.
When moving the ledger account into trial balance, assets account need to punt in the top of trial balance follow by liabilities and equity. Revenues and expenses are records all the way down by follow equities accounts.
4) Make the adjusting entries:
Once the unadjusted trial balance is prepared, the next step of accounting cycle is making the necessary adjustments.
The adjustments are come from many reasons some of those are because of under or over recognition, wrong classification, or sometime because of audit adjustments.
Once the list of adjusting transactions are approve by the authorized person, then all of those adjustment need to process in the account ledgers and reflect to trial balance.
Sometime adjustments are book directly into account ledgers and then update into trial balance. And sometime, the adjustments book both in account ledgers and then also book in trial balance.
5) Preparing adjusted trial balance:
Once all the adjusting entries are made to trial balance and account ledgers, the fifth step of accounting cycle is preparing the adjusted trial balance. This statements should be done before drafting the financial statements.
Most of the cases, accountant or auditors use the trial balance to draft financial statements. This is because the process of drafting the financial statements take after accountant confirm trial balance is reconcile.
Adjusted trial balance is quite similar to the unadjusted trial balance. The key information that included in this statement is entity name, the accounting period, name of the statements, list of account along with the debit or credit balance.
6) Draft the financial statements:
This is the importance step of accounting cycle. Once all of the accounts ledgers are closed and transfer into the trial balance and all the necessary adjustments are made into those ledgers and trial balance, accountant need to prepare the financial statements.
The four main types of financial statements along with the noted to the statements are prepared using the information from adjusted trial balance.
Those financial statements including balance sheet, income statement, statement of change in equity, statements of cash flow and noted to financial statements.
7) Journalize and post the closing entries:
If there is the temporary account at the end of accounting period, accountant need to close that account so that accountant can open the account for the next period.
The temporary accounts need to close and transfer to its permanence account. This is normally done for the manual accounting records.
8) Preparing post-closing trial balance:
In the last step of accounting cycle, accountant require to perform the post-closing trial balance. This statement is prepared after accountant make all necessary adjustment to general ledger and the adjusted trial balance, and all the suspend accounts are close.
The main purpose of preparing this post-closing trial balance is to ensure that all accounts are balance and ready for recording next period financial transactions.
Trial balance is not the financial statements and it is could not be submitted to the key end users instead of financial statements. This statement is prepared for the purpose of drafting financial statements, reviewing errors, check mathematically correctness of entry, and so on.
Normally at the end of the period, the accountant might need to prepare the financial statements and other related financial reports for management.
Accountant need to make sure that the ledgers are correctly enters according to the accounting equation so that the financial statements are mathematically correct. This is the reason why accountant need to prepare trial balance.
In short, trial balance is prepared for the purpose of identifying and detecting errors that enter in general ledgers. It is also use as the working papers for accountant and auditors in drafting financial statements.
As mentioned above, if the debit side is over the credit side, that mean the accounting entry is not mathematically correct. In this case, accountant need to double check his accounting entries and classification.
Maybe the amount of the specific transaction is not equally enter between debit side and credit side. Or maybe the classification is not correctly classified respect to accounting equation.
It is importance to note that trial balance could not detect all the error that make during the entry. For example, the elimination of entity both in debit and credit still make trial balance reconcile.
Trial balance is prepare in four or five column and list down all closing general ledgers by ranging the ledgers from assets account to liabilities and equity. Income statements account like revenues and expenses are listed down subsequently after equity.
This is to make sure that preparer of financial statements is easy to identify which items are belong to assets, liabilities, equity, revenues and expenses.
The main important element that should include in this statement is the account name, reference, balance before adjustment, adjusting entry, and balance after adjustments.
Sometimes, this statement is print out along with the five financial statements for management purposes. But it is generally not