Unadjusted trial balance is the list of the general ledger accounts balance (balance sheet’s items and income statement’s items) for the specific accounting period before making any adjustment. In other words, before proceeding with an adjustment.
This statement is usually prepared in four columns. When the accountant or auditor reviews the accounting records, the adjusting entity will be made.
Note that numbers adjustment is necessary to make accounting records true and fair review following the entity’s accounting policies and accounting standards that entity complying with.
Once all adjustments are made to the unadjusted trial balance, we will have the adjusted trial balance. And this is the main reason that makes these two statements different.
It is important to note that the unadjusted trial balance is prepared in traditional bookkeeping. Now, most companies use an accounting system where the system automatically creates the trial balance.
What is the Purpose of an Unadjusted Trial Balance?
- To check the accuracy of a company’s double-entry bookkeeping process: The unadjusted trial balance is used to ensure that transactions are correctly entered into the record books and accurately recorded in the ledgers. It involves checking all entries to see if they match up with underlying source documents or if there are math mistakes, incorrect account numbers, or incorrectly applied for debits/credits.
- To find discrepancies in the general ledger accounts: As part of the trial balance process, it is essential to identify differences between what was recorded in the ledgers and what happened during the accounting period. This allows corrections to be made before closing the period and preparing financial statements.
- To verify the amounts in each account are correct: An unadjusted trial balance helps ensure that all posted figures in each version are accurate and complete so that when it comes time to prepare financial reports and statements later on, there will be no surprises.
- To ensure that all transactions are recorded: Every transaction should be included on an unadjusted trial balance; this consists of any adjustments needed at the end of a period due to things like depreciation, reserve calculations, interest expense accruals, etc.
- To identify any entries that may have been left out or entered incorrectly: Any omissions or incorrect entries can easily be discovered by comparing the trial balance totals with those reported previously on financials such as a balance sheet or income statement.
- To identify and adjust errors in the ledger before preparing financial statements: By carefully examining all individual accounts listed on an unadjusted trial balance, mistakes can be spotted quickly and corrected before moving on to preparing interim/quarterly or annual financial reports for investors and stakeholders.
- To provide accurate information to prepare financial statements and other reports: An unadjusted trial balance is used as a starting point during report preparation; this ensures that all necessary data is collected appropriately from prior periods into one accurate report on which decisions can then be based on going forward.
- To demonstrate to shareholders, lenders, and taxing authorities that all business activities are correctly reported: Preparing an unadjusted trial balance shows to external interested parties – such as shareholders, lenders, auditors, and regulators – that adequate measures have been taken within an organization’s processes to fully record its activity over a specified period without omitting anything crucial details related-to understanding performance drivers or trends more broadly over extended periods of analysis (i.e., monthly averages).
- To list individual asset, liability, equity, income, and expense account balances before preparing closing entries: This step ensures proper recognition of revenue sources while also taking into consideration market shifts that might go unrecognized by solely relying on standard accounting approaches/reports alone when keeping track of organizational performance across multiple organizations (i .e., parent companies vs. subsidiaries).
- As a preliminary step in creating the new accounting period: At its core function during every reporting cycle (monthly/quarterly/annually), an unadjusted trial balance serves as a foundation for auditors & regulators alike when beginning their review process; this provides them with access & visibility into critical figures – such as assets/liabilities/capital/revenues & expenses – across different organizations simultaneously during their examination stage(s) within any given time-frame corresponding with end-of-period filings.
Why is it called unadjusted trial balance?
An unadjusted trial balance is a list of all the company’s accounts and the balances in each account before any adjustments to the financial statements are made.
This includes all transactions recorded during a period, such as money received, payments made, expenses incurred, etc. The unadjusted trial balance gives an overall picture of where the business stands financially at any given time.
The name “unadjusted” implies that no adjustment has been made to the accounts or their balances and reflects the basic financial information for a certain period.
Adjustments are typically needed for figures on an unadjusted trial balance because different calculations may be required to record entries more accurately or report accurate financial statements.
Once all necessary corrections have been made and adjusted accounts reflect updated balances, this trial balance becomes known as an adjusted trial balance.
How to Find Net Income From Unadjusted Trial Balance?
To find the net income from an unadjusted trial balance, you will need to follow these steps:
- Gather your financial information, including the total revenues and expenses for the period.
- Subtract the total expenses from the total revenues to get your net income for the period.
- Use this net income to decide resource allocation and the next steps in financial management.
When is the unadjusted trial balance prepared?
The unadjusted trial balance is typically prepared toward the end of the accounting process. It is a financial statement that lists all the general ledger accounts’ debit and credit balances.
This document should be generated before any adjustments must be made for accrued, prepaid, or deferred expenses. After it is generated, adjusting entries can be made before the income statement, and balance sheet are created.
Step By Step to Close Unadjusted Trial Balance
To close an unadjusted trial balance, you will need to follow these steps:
- Create a new account in the general ledger called “income summary.”
- Transfer all debits and credits from the temporary accounts to the income summary.
- Calculate the net difference between the debits and credits, which will be either a debit or credit balance.
- Debits should equal credits for an entry to be valid, so if your calculation results in a debit balance, create an adjusting entry on the income summary as a credit to offset it and vice versa if there is a credit balance.
- Finally, transfer the net income from the income summary account into your retained earnings account.
Explanation and Examples
There are many reasons why the trial balance is prepared. One of the main reasons to make this statement is to detect the error that might occur during accounting entry in the accounting ledger.
Several reasons require an accountant to adjust the company’s accounting ledgers.
For example, adjustment to correct over accrual of electricity expenses. Or correcting adjustments when the accountant noted that the debit balance and credit balance of the trial balance are not reconciled due to the incorrect entries made into the general ledgers.
Another example is that an accountant might post salary expenses on the debit side for both the salary and cash/bank accounts.
If this is the case, the trial balance will show the variance between the debit and credit sides. And the accountant needs to back to confirm the problem, then make adjustments.
Same as the adjusted trial balance, this statement shows all the closing account balances. It ranks from assets accounts and liabilities accounts, followed by equity, revenues, and expenses accounts.
Assets and expenses accounts are shown on the debit side, while liabilities, equities, and revenues accounts are down on the credit side.
Trial balance can detect only certain problems like difference amounts recording the same transaction and incorrectly recording debit or credit rules.
Some mistakes could not be detected, such as failing to record the transactions, removing or eliminating transactions on both sides, and the trial balance.
The following is an example of an unadjusted trial balance: