An adjusted trial balance is the result of verifying the accuracy of all financial data in a business’s general ledger, the basis for all accounting data. For double-entry accounting (the most commonly used method), accountants and business owners take debits and credits for all accounts during a given accounting period and record them side-by-side. The result of this first listing is referred to as the trial balance or the unadjusted trial balance.
One big requirement for the trial balance or unadjusted trial balance is that the credits and debits are equal. If they aren’t, that means there’s a mistake somewhere (a credit or debit was missed or maybe recorded incorrectly). In that case, it’s necessary to go back through the general ledger, find the error, and resolve it. Once resolved, the updated number is called the adjusted trial balance.
Finding the adjusted trial basis is the last step in the accounting cycle prior to creating financial statements. It’s the equivalent of checking your math homework with an answer sheet. Let’s say you complete the homework and check your answers. All of them are correct except for one, so you take that one problem and figure out where you went wrong. The same process applies to finding the adjusted trial balance—including a bit of sleuthing to find the right answer.
When is the Adjusted Trial Balance Calculated?
Fortunately, this isn’t something that has to be done every day. Most businesses run accounting periods to create financial statements on either monthly, quarterly, or annual cycles, so it’s likely you’ll only run into this a handful of times per year.
However, it is absolutely critical to go through the process and check your accounting work, as all of the business’s financial statements are based off the adjusted trial balance. Using inaccurate numbers in your business’s financial reports could cause all kinds of problems. Business leaders might choose to make investments based on inflated cash numbers. Potential investors may decide to turn down opportunities based on incorrect financials. And so on.
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What is Needed to Calculate the Adjusted Trial Balance?
In order to calculate the adjusted trial balance, you’ll need to create the trial balance or unadjusted trial balance first. That means going through the business’s general ledger for the specified accounting period and recording all credits and debits by account. The account is simply the category that each credit or debit would fall into—cash, inventory, accounts receivable, and accounts payable are all examples of accounts.
Trial Balance Example
Let’s use our sample business, XYZ Creations, to demonstrate how it works. For January-March of 2019, here’s a listing of all accounts with all corresponding credits and debits from XYZ Creations’ general ledger.
|Credit Cards Payable||$5,000|
Take a look at the two totals at the bottom. They don’t match up, so that means we’ve got some checking to do. We start by reviewing each individual entry for each account—for example, we look at each entry listed as “cash”, each entry listed as “inventory”, and so on. We eventually find the discrepancy in accounts payable.
|01/25/19||4006||Cash in Bank||-$600|
|3/14/19||1408||Cash in Bank||-$1,200|
|Total Accounts Payable||$21,000|
With this information, we can go back and update the trial balance or unadjusted trial balance so that the two totals match up. To show our work, we add a column in the middle called “adjusting entries” that shows where we found the missing data.
|Account||Unadjusted Trial Balance||Adjusting Entries||Adjusted Trial Balance|
|Credit Cards Payable||($5,000)||($5,000)|
What Happens After the Adjusted Trial Balance is Calculated?
Once the adjusted trial balance has been calculated and the totals match, accountants and business owners can confidently create all subsequent financial statements for the accounting cycle. Both the income statement and the balance sheet can be created directly from the adjusted trial balance; the cash flow statement is generated off both the income statement and balance sheet. These are the three most important financial statements for the business.
It’s clearly critical to make sure the foundational numbers these reports are based on are accurate, and that puts pressure on business owners and accountants. However, the “check your work” process has a lot of outside support from modern accounting software.
General ledger systems can automatically capture all credits and debits to calculate the trial or unadjusted trial balance and reduce the need for corrections in the first place. So while it is a critical step in the accounting cycle process, software can greatly reduce the risk of errors and streamline the accounting cycle close.
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