Adjusted Trial Balance: Definition, Preparation & Example

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  • 0:01 Definition of Adjusted…
  • 0:45 Trial Balance to…
  • 1:51 Preparing the Worksheet
  • 5:16 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

There are many steps in the accounting cycle that must be taken before a company's financial statements are prepared. In this lesson, we will be discussing one of those steps - creating an adjusted trial balance.

Adjusted Trial Balance - Defined

Have you ever noticed that no matter what you do in life it involves a process? Think about it. You don't get out of bed in the mornings dressed and ready for work. You have to follow certain steps to get to that point. Well, accounting is the same way. Financial statements aren't immediately prepared as soon as accounting books are opened. It takes a series of steps to get to that point.

One of those steps involves something called an adjusted trial balance. The adjusted trial balance is a report that lists all the accounts of a company and their balances after adjustments have been made. I know, the concept can be a little confusing, so let's dive a little deeper into it and figure it all out.

Trial Balance to Adjusted Trial Balance

Ok. So you know the textbook definition of the adjusted trial balance, but what is it in layman's terms, and how do you create one? Well, let me start by taking a step back in the accounting process and talking about the trial balance.

The trial balance is a listing of a company's accounts and their balances after all the transactions of an accounting period have been recorded. Some of the company's accounts will need to have an adjusting entry made.

Adjusting entries are journal entries that are made on the last day of the accounting period that bring the balances of specific accounts up to date and make sure that all account balances conform to the principles of the accrual basis accounting method.

The accrual basis accounting method is the method of accounting that recognizes revenue when it is earned and expenses when they are incurred regardless of when cash is received or paid out.

Before any adjusting entries are made, accountants will prepare a multiple column worksheet. This worksheet allows the person preparing journal entries to pencil in the needed adjustments and make sure that the total of all debit and credit balances still add up after adjustments have been made.

Preparing the Worksheet

The best way to explain how to prepare an adjusted trial balance is to just walk you through one.

Adjusted trial balance worksheet

Jimmy is the comptroller of a small manufacturing firm. It is time for him to begin getting information ready to prepare his company's quarterly financial statements. 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.

The first two columns are the account balances of the company after all transactions have been posted. These numbers come directly from the balances that appear in the general ledger. The second two columns show the adjustments that have been made to a few accounts. Let's take a little time to look at the adjusted accounts.

The first thing that Jim does is to look at the supplies account. He knows that for this accounting period, the company used up $18,480 worth of supplies. To make sure that he accounts for that and reflects the correct balance on the financial statements, he will have to adjust the supplies account with a credit of $18,480 and the supplies expense account with a debit of $18,480. Here is what the journal entry loos like:

Account debit credit
Supplies expense $18,480
Supplies $18480

This entry will show up in the adjustments column of the worksheet. The end result is a decrease in the supplies account and an increase in the supplies expense account balances. This takes care of the cost of supplies used by the company during this accounting period.

The second account that needs attention is the prepaid rent account. At the beginning of the year, the company paid 6 month's rent on a storage warehouse that they use. Since the company produces quarterly financial statements, the time accounted for in each accounting period is 3 months. Jim knows that of the 6 month's prepaid rent, the company has used up 3 months, or half, of the prepayment.

To account for this, he has to make an adjustment to the prepaid rent and the rent expense account. He credits prepaid rent in the amount of $12,000, which is half of the prepayment and debits the rent expense account in the same amount. Again, the balances in the two accounts will change as a result of the adjustment. The journal entry looks like this:

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