What is an Adjusted Trial Balance?
Definition: An adjusted trial balance is a list of accounts and their balances at the end of an accounting period after the adjusting journal entries have been posted. In other words, it’s a trial balance that is prepared at the end of the year to reflect the year-end adjustments.
An adjusted trial balance is prepared after adjusting entries are made and posted to the ledger. Adjusting entries are prepared at the end of the accounting period for: accrual of income, accrual of expenses, deferrals, prepayments, depreciation, and allowances.
This is the second trial balance prepared in the accounting cycle. Its purpose is to test the equality between debits and credits after adjusting entries are entered into the books of the company.
The adjusted trial balance is an internal document that lists the general ledger account titles and their balances after any adjustments have been made. The adjusted trial balance is not a financial statement, but the adjusted account balances will be reported on the financial statements.
The adjusted trial balance (as well as the unadjusted trial balance) must have the total amount of the debit balances equal to the total amount of credit balances.
What Does Adjusted Trial Balance Mean?
What is the definition of adjusted trial balance? Adjusted trial balances are prepared at the end of the accounting cycle and are used to help prepare the financial statements for the period. Before the adjusted TB can be prepared, the year-end adjustments must be made. These adjustments usually include adjustments for prepaid and accrued expenses along with non-cash expenses like depreciation. These adjustments are added to the unadjusted trial balance on the accounting worksheet and the new adjusted TB is prepared.
An adjusted trial balance is a listing of the ending balances in all accounts after adjusting entries have been prepared. The intent of adding these entries is to correct errors in the initial version of the trial balance and to bring the entity’s financial statements into compliance with an accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards.
Once all adjustments have been made, the adjusted trial balance is essentially a summary-balance listing of all the accounts in the general ledger – it does not show any detail transactions that comprise the ending balances in any accounts. The adjusting entries are shown in a separate column, but in aggregate for each account; thus, it may be difficult to discern which specific journal entries impact each account.
The adjusted trial balance is not part of the financial statements – rather, it is an internal report that has two purposes:
- To verify that the total of the debit balances in all accounts equals the total of all credit balances in all accounts; and
- To be used to construct financial statements (specifically, the income statement and balance sheet; construction of the statement of cash flows requires additional information).
The second application of the adjusted trial balance has fallen into disuse, since computerized accounting systems automatically construct financial statements. However, it is the source document if you are manually compiling financial statements. In the latter case, the adjusted trial balance is critically important – financial statements cannot be constructed without it.
Example of an Adjusted Trial Balance
The following report shows an adjusted trial balance, where the initial, unadjusted balance for all accounts is located in the second column from the left, various adjusting entries are noted in the third column from the left, and the combined, net balance in each account is stated in the far right column.
July 31, 20XX
|Fixed assets (net)||210,000||210,000|
|Cost of goods sold||290,000||290,000|
The adjusting entries in the example are for the accrual of $25,000 in salaries that were unpaid as of the end of July, as well as for $50,000 of earned but unbilled sales.
There are two main ways to prepare an adjusted trial balance. Both ways are useful depending on the site of the company and chart of accounts being used.
You could post accounts to the adjusted trial balance using the same method used in creating the unadjusted trial balance. The account balances are taken from the T-accounts or ledger accounts and listed on the trial balance. Essentially, you are just repeating this process again except now the ledger accounts include the year-end adjusting entries.
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.
Note that only active accounts that will appear on the financial statements must to be listed on the trial balance. If an account has a zero balance, there is no need to list it on the trial balance.
Define Adjusted Trial Balance: Adjusted TB means a listing of the chart of accounts with balances after year-end AJEs have been made. This listing is used to prepare the financial statements for the year as well as recording the closing journal entries to close the books for the year.