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:
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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The third thing that Jim does is to examine any depreciation of equipment that has occurred over the accounting period. He computes the depreciation and makes the needed adjustment. For this time period, there is depreciation in the amount of $1100.00. Jim adjusts the accumulated depreciation account by crediting that account $1100 and debiting the depreciation expense account in the same amount.
The last adjustment that Jim has to make is in the interest accounts. Since the company has a loan that is classified in notes payable, that loan accrues interest. To account for the interest that has accrued in this accounting period, Jim calculates the 3 months interest. That interest is only $150. He makes an adjustment to the interest payable account by crediting the account $150. He then turns around and makes an adjustment to the interest expense account for the same amount.
Now the amounts in these journal entries can be entered in the worksheet under Adjustments, hears how it looks:
When Jim is finished, he calculates the new balances of the accounts and enters them in the last two columns on the worksheet. He is now ready to use this information to help create the financial statements.
The main goal of the accounting process is to create accurate financial statements. In order to reach this goal, there are a number of steps that must be completed. One of those steps is to create an adjusted trial balance.
An adjusted trial balance is a report that lists all the accounts of a company and their balances after adjustments have been made. The adjusted trial balance is created on a multicolumn worksheet.
The first two columns of the worksheet contain information from the 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. These adjustments, called adjusting entries, are journal entries that are made on the last day of the accounting period that brings the balances of specific accounts up to date and makes 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. Adjustments are entered into the middle two columns of the worksheet.
Once adjustments have been entered, the account balances are recalculated, and the final and most accurate balances are entered into the last two columns of the worksheet. When the adjusted trial balance is complete, you are one step closer to reaching the goal of creating a company's financial statements.
After you've reviewed this video lesson, you should be able to:
Identify the main goal of the accounting process and define accrual basis accounting method
Define adjusted trial balance and explain how to create one
Describe what the trial balance and adjusting entries are
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