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3 6 Prepare a Trial Balance Principles of Accounting, Volume 1: Financial Accounting

Jimmy knows that all the transactions for the quarter have been journalized and posted, so he can create his trial balance report and start working on the worksheet for any adjustments. If you look in the balance sheet columns, we do have the new,up-to-date retained earnings, but it is spread out through twonumbers. If you combine these two individual numbers ($4,665 –$100), you will have your updated retained earnings balance of$4,565, as seen on the statement of retained earnings. The statement of retained earnings (which is often a componentof the statement of stockholders’ equity) shows how the equity (orvalue) of the organization has changed over a period of time.

The statement ofretained earnings will include beginning retained earnings, any netincome (loss) (found on the income statement), and dividends. Thebalance sheet is going to include assets, contra assets,liabilities, and stockholder equity accounts, including endingretained earnings and common stock. There are five sets of columns, each set having a column for debit and credit, for a total of 10 columns. The five column sets are the trial balance, adjustments, adjusted trial balance, income statement, and the balance sheet. After a company posts its day-to-day journal entries, it can begin transferring that information to the trial balance columns of the 10-column worksheet. These principles are satisfied through the use of the accrual basis method.

  1. Looking at the income statement columns, we see that all revenue and expense accounts are listed in either the debit or credit column.
  2. It will create a ledger of all your transactions and turn them into financial statements for you.
  3. A more complete picture of company position develops after adjustments occur, and an adjusted trial balance has been prepared.
  4. These next steps in the accounting cycle are covered in The Adjustment Process.
  5. Once all ledger accounts and their balances are recorded, the debit and credit columns on the trial balance are totaled to see if the figures in each column match each other.

Now that the trial balance is made, it can be posted to the accounting worksheet  and the financial statements can be prepared. You could also take the unadjusted trial balance and simply add the adjustments to the accounts that have been changed. In many ways this is faster for smaller companies because very few accounts will need to be altered. You may notice that dividends are included in our 10-columnworksheet balance sheet columns even though this account is notincluded on a balance sheet.

What Is an Adjusted Trial Balance?

Note that for this step, we are considering our trial balance to be unadjusted. The unadjusted trial balance in this section includes accounts before they have been adjusted. As you see in step 6 of the accounting cycle, we create another trial balance that is adjusted (see The Adjustment Process). Just like in the unadjusted trial balance, total debits and total credits should be equal. Take a couple of minutes and fill in the income statement and balance sheet columns.

Format and methods of preparing adjusted trial balance

Total expenses are subtracted from total revenues to get a net income of $4,665. If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. This net income figure is used to prepare the statement of retained earnings. For instance, in our vehicle sale example the bookkeeper could have accidentally debited accounts receivable instead of cash when the vehicle was sold. The debits would still equal the credits, but the individual accounts are incorrect.

The adjusted trial balance is key to accurate financial statements

Before posting any closing entries, you want to make sure that your trial balance reflects the most accurate information possible. Closing entries are completed after the adjusted trial balance is completed. We’ll explain more about what an adjusted trial balance is, and what the difference is between a trial balance and an adjusted trial balance.

Yes, the adjusted trial balance must balance the debits with the credits for the accounting period being reported. All trial balance reports, whether adjusted or unadjusted, must match debits to credits. This ensures that the entries made into the accounting system are in proper alignment with the double-entry bookkeeping system. Even if debits and credits balance out, it is still possible that mistakes were made. But if debits and credits do not balance, then it is certain that one mistake or more were made. While the definition of the document is relatively straightforward, you’re probably thinking – what is the purpose of the adjusted trial balance?

The trial balance is a listing of a company’s accounts and their balances after all transactions of an accounting period have been recorded. Some of the company accounts will not adequately reflect their true balance at the time, and adjustments will need to be made. A trial balance is a report of all accounting transactions entered throughout the accounting period. Its main purpose is to ensure that all debits equal all credits for the transactions entered during that time. The adjusted trial balance is a report of all transactions entered during an accounting period after the adjusting entries have been completed.

If you combine these two individual numbers ($4,665 – $100), you will have your updated retained earnings balance of $4,565, as seen on the statement of retained earnings. For example, IFRS-based financial statements are only required to report the current period of information and the information for the prior period. US GAAP has no requirement for reporting prior periods, but the SEC requires that companies present one prior period for the Balance Sheet and three prior periods for the Income Statement. Under both IFRS and US GAAP, companies can report more than the minimum requirements. When the accounting system creates the initial report, it is considered an unadjusted trial balance because no adjustments have been made to the chart of accounts.

When you prepare a balance sheet, you must first have the most updated retained earnings balance. To get that balance, you take the beginning retained earnings balance + net income – dividends. If you look at the worksheet for Printing Plus, you will notice there is no retained earnings sole trader bookkeeping account. That is because they just started business this month and have no beginning retained earnings balance. An adjusted trial balance is prepared by creating a series of journal entries that are designed to account for any transactions that have not yet been completed.

If you review the income statement, you see that net income is in fact $4,665. Next you will take all of the figures in the adjusted trial balance columns and carry them over to either the income statement columns or the balance sheet columns. Unearned revenue had a credit balance of $4,000 in the trial balance column, and a debit adjustment of $600 in the adjustment column. Remember that adding debits and credits is like adding positive and negative numbers. This means the $600 debit is subtracted from the $4,000 credit to get a credit balance of $3,400 that is translated to the adjusted trial balance column.

Dividends are taken away from the sum of beginning retained earnings and net income to get the ending retained earnings balance of $4,565 for January. This ending retained earnings balance is transferred to the balance sheet. This step saves a lot time for accountants during the financial statement preparation process because they don’t have to worry about the balance sheet and income statement being off due to an out-of-balance error. Keep in mind, this does not ensure that all journal entries were recorded accurately. Total revenue was $98,420 and total expenses were $26,710 for a net income of $71,710. Had the unadjusted trial balance been used to prepare the income statement, total revenue would have added up to $93,420 and total expenses would have been $25,650.

This balance is transferred to the Cash account in the debit column on the unadjusted trial balance. Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock ($20,000) and Service Revenue ($9,500) all have credit final balances in their T-accounts. These credit balances would transfer to the credit column on the unadjusted trial balance. Once all ledger accounts and their balances are recorded, the debit and credit columns on the trial balance are totaled to see if the figures in each column match each other.

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