Adjusted Trial Balance Definition

In simple words, when accounts are prepared at the end of the accounting period, ledger balances must be updated with relevant adjustments, which are the results of the partial transaction, improper transactions, and skipped transactions. Such types of transactions are deposits, closing stocksClosing StocksClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more, depreciation, etc. Once all necessary adjustments are made, a new second trial balance is prepared to ensure that it is still balanced. This new trial balance is called the adjusted trial balance.

Its purpose is to ensure that the total amount of debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more in the general ledger is equal to the total amount of credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more in the general ledger.

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Entries in an Adjusted Trial Balance

#1 – Accrual of earned revenue but not yet recorded.

It arises when an asset is a sale, but the customer has not yet billed for the same. Eg. Account receivableAccount ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, accrued interest.

Accrued revenueAccrued RevenueAccrued revenues are the company’s revenue in the normal course of business after selling the goods or providing services to a third party. However, the payment has not been received. Instead, it is shown as an asset in the balance sheet of the company.read more A/C – Dr

Revenue A/C- Cr

#2 – Accrual of expenses incurred but not yet recorded.

It is an expense recorded in accounts before the payment is made. E.g., Interest payableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.read more, salaries, and wages payable.

Expense A/C- Dr

Expense payable- Cr

#3 – Prepayments

PrepaymentPrepaymentPrepayment refers to paying off an expense or debt obligation before the due date. Often, companies make advance payments for expenses as well as goods and services to shed their financial burden. Advance payments also act as a tool to attain monetary benefits. Examples of prepayment include loan repayment before the due date, prepaid bills, rent, salary, insurance premium, credit card bill, income tax, sales tax, line of credit, etc.read more is the setting of payment before its due date. Eg. Prepaid rent.

Prepaid expensePrepaid ExpensePrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more A/C- Dr

Cash A/C- Cr

#4 – Depreciation

DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is a non-cash expense identified to account for the deterioration of fixed assets to reflect the reduction in useful economic life.

Adjusted Trial Balance Example

To understand this better let us see the examples

Suppose a printing company name ACE Prints run a small business of printing, their trial balanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more as on 31st March’2018 is below:-

We get clear information from trial balance about debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more entries and credit entries. But there is some more information required to adjust the trial balance.

  • The salary due to the employee as on 31st March’2018=$ 50,000Rent is inclusive of refundable deposit of= $ 20,000

The adjustments need to be made in the trial balance for the above details.

The below entry is done in the Salary account.

Here, the adjustment will be $ 80,000.00 as the total salary payableSalary PayableSalary payable refers to the liability of the company towards its employees against the amount of salary of a period that became due but has not been paid yet to them by the company and it is shown in the balance of the company under the head liability.read more is $ 80,000.

The below entry is done in the Rent account.

Here, the adjustment will be $ 50,000.00 as the rent deposit is $ 20,000, the rent payment will be $ 30,000.

The adjusted trial balance will be as follows:-

The adjustments are made as below:-

  • A rent deposit is taken into consideration.An outstanding salary also included in it.

Hence, the trial balance includes all considerable adjustments, which is termed as adjustment trial balance.

How to Prepare Adjusted Trial Balance?

There are two methods for the preparation –

  • The method first is similar to the preparation of an unadjusted trial balanceUnadjusted Trial BalanceAn 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 adjusting entries.read more. The ledger accounts are adjusted for the end of periods adjusting entriesAdjusting EntriesAdjusting entries (AJE) are entries made in a business firm’s accounting journals to adapt or update the revenues and expenses accounts in accordance with the accrual principle and the matching concept of accounting, and examples are Prepaid Expenses and Accrued but Unpaid Expenses.read more, and the account balance is listed to prepare an adjusted trial balance. This method takes a lot of time, but it is very systematic and usually used by large companies where many adjustments need to be made by companies in theirLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more ledger accountsLedger AccountsLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more.The second method is quite fast and straightforward, but it is not systematic and usually used by small companies where less adjustment needs to be done. In this adjustment, entries are directly added to the unadjusted trial balance to convert it to an adjusted trial balance.

Purpose

  • The primary purpose of the adjusted trial balance is a document that shows the total amount of debt against the total amount of credit. It is not considered as a financial statementAs A Financial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more because it is only used as an internal document.Hence, it is beneficial for big companies to adjust many entries. It also ensures that entries are done correctly; if balances entered into financial statements are incorrect, the financial statements themselves will be inaccurate, and the total must be equal.Any difference indicates some error in entries, ledger, or calculations. So it gives a clear picture of the performance of the company. It also helps to monitor the company’s performance as the adjusted trial balance is prepared after considering all adjustments of entries of different accounts.

Difference Between Trial Balance and Adjusted Trial Balance

  • A trial balance is prepared first, whereas adjusted trial prepared post-trial balance. Trial balance excludes entries like accrued expenseLike Accrued ExpenseAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more, accrued revenue, prepayment, and depreciation, whereas adjusted trial balance includes the same.A trial balance is a list of closing balances of ledger account on a particular point of time. In contrast, adjusted balance is a list of general accountGeneral AccountGeneral Account is a deposit account where an insurance company puts all its premiums collected from the policies it underwrites. This is used to fund the company’s operating expenses and the payment of several insurance claims & benefits. read more and their balances at a point of time after the adjusting entries have been posted.

Adjusted Trial Balance Video

This article has been a guide to what is Adjusted Trial Balance? Here we discuss adjusted trial balance examples, preparation, purpose, and journal entries. You may learn more about accounting from the following articles –

  • Trial Balance ExamplesAdjusting Entries in JournalJournal vs LedgerDeferred Tax Assets