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4 5: Prepare Financial Statements Using the Adjusted Trial Balance Business LibreTexts

Its purpose is to test the equality between debits and credits after adjusting entries are made, i.e., after account balances have been updated. As with the unadjusted trial balance, transferring information
from T-accounts to the adjusted trial balance requires
consideration of the final balance in each account. If the final
balance in the ledger account (T-account) is a debit balance, you
will record the total in the left column of the trial balance. If
the final balance in the ledger account (T-account) is a credit
balance, you will record the total in the right column. If you look in the balance sheet columns, we do have the new,
up-to-date retained earnings, but it is spread out through two
numbers. If you combine these two individual numbers ($4,665 –
$100), you will have your updated retained earnings balance of
$4,565, as seen on the statement of retained earnings.

Treat the income statement and balance sheet columns like a
double-entry accounting system, where if you have a debit on the
income statement side, you must have a credit equaling the same
amount on the credit side. In this case we added a debit of $4,665
to the income statement column. This means we must add a credit of
$4,665 to the balance sheet column. Once we add the $4,665 to the
credit side of the balance sheet column, the two columns equal
$30,140.

The final total in the
debit column must be the same dollar amount that is determined in
the final credit column. Service Revenue had a $9,500 credit balance in the trial balance
column, and a $600 credit balance in the Adjustments column. To get
the $10,100 credit balance in the adjusted trial balance column
requires adding together both credits in the trial balance and
adjustment columns (9,500 how to write an accounting ledger with pictures + 600). Once all accounts have balances in the adjusted trial
balance columns, add the debits and credits to make sure they are
equal. If
you check the adjusted trial balance for Printing Plus, you will
see the same equal balance is present. A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.

In addition, your adjusted trial balance is used to prepare your closing entries, which is the next step in the accounting cycle. If we go back and look at the trial balance for Printing
Plus, we see that the trial balance shows debits and credits equal
to $34,000. For example,
IFRS-based financial statements are only required to report the
current period of information and the information for the prior
period. US GAAP has no requirement for reporting prior periods, but
the SEC requires that companies present one prior period for the
Balance Sheet and three prior periods for the Income Statement. Under both IFRS and US GAAP, companies can report more than the
minimum requirements.

This data provides the foundation for your financial statements, but it does not break down transactions by accounting cycle. This balance is transferred to the Cash account in the debit column on the unadjusted trial balance. Accounts Payable ($500), Unearned Revenue ($4,000), Common Stock ($20,000) and Service Revenue ($9,500) all have credit final balances in their T-accounts.

  • The general purpose of producing a trial balance is to ensure that the entries in a company’s bookkeeping system are mathematically correct.
  • Treat the income statement and balance sheet columns like a double-entry accounting system, where if you have a debit on the income statement side, you must have a credit equaling the same amount on the credit side.
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Magnificent Adjusted Trial Balance

A company’s transactions are recorded in a general ledger and later summed to be included in a trial balance. In these columns we record all asset, liability, and equity accounts. Ending retained earnings information is taken from the statement of retained earnings, and asset, liability, and common stock information is taken from the adjusted trial balance as follows. An adjusted trial balance is prepared using the same format as that of an unadjusted trial balance.

As with the accounting equation, these debit and credit totals must always be equal. If they aren’t equal, the trial balance was prepared incorrectly or the journal entries weren’t transferred to the ledger accounts accurately. The main purpose of the adjusted trial balance is to prove that the total of debit balances of all accounts still equal to the total of credit balances after making all required adjusting entries.

If a trial balance is in balance, does this mean that all of the numbers are correct? It is important to go through each step very carefully and recheck your work often to avoid mistakes early on in the process. Another way to find an error is to take the difference between the two totals and divide by nine. If the outcome of the difference is a whole number, then you may have transposed a figure.

A quick primer on double-entry accounting

Next you will take all of the figures in the adjusted trial
balance columns and carry them over to either the income statement columns or the balance
sheet columns. Once the trial balance information is on the worksheet, the next
step is to fill in the adjusting information from the posted
adjusted journal entries. Both US-based companies and those headquartered in other
countries produce the same primary financial statements—Income
Statement, Balance Sheet, and Statement of Cash Flows. Ending retained earnings information is taken from the statement
of retained earnings, and asset, liability, and common stock
information is taken from the adjusted trial balance as
follows.

What is an unadjusted trial balance?

Remember that the balance sheet represents the accounting equation, where assets equal liabilities plus stockholders’ equity. The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time. The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period. The statement of retained earnings is prepared before the balance sheet because the ending retained earnings amount is a required element of the balance sheet. The following is the Statement of Retained Earnings for Printing Plus.

Income Statement

The final total in the debit column must be the same dollar amount that is determined in the final credit column. For example, if you determine that the final debit balance is $24,000 then the final credit balance in the trial balance must also be $24,000. If the two balances are not equal, there is a mistake in at least one of the columns. There are five sets of columns, each set having a column for
debit and credit, for a total of 10 columns. The five column sets
are the trial balance, adjustments, adjusted trial balance, income
statement, and the balance sheet. After a company posts its
day-to-day journal entries, it can begin transferring that
information to the trial balance columns of the 10-column
worksheet.

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An adjusted trial balance lists the general ledger account balances after any adjustments have been made. These adjustments typically include those for prepaid and accrued expenses, as well as non-cash expenses like depreciation. Once all ledger accounts and their balances are recorded, the debit and credit columns on the trial balance are totaled to see if the figures in each column match each other.

After a company posts its day-to-day journal entries, it can begin transferring that information to the trial balance columns of the 10-column worksheet. To prepare the financial statements, a company will look at the
adjusted trial balance for account information. From this
information, the company will begin constructing each of the
statements, beginning with the income statement.