What is Adjusted Trial Balance?
The Adjusted Trial Balance is a statement prepared at the end of the accounting cycle after adjusting entries have been made. It lists all the accounts with adjusted balances, ensuring that the total debits equal total credits. Adjusting entries are made to record accruals, deferrals, estimates, and corrections, and it serves as a foundation for preparing the financial statements.
Why is it important or used in Accounting?
The Adjusted Trial Balance is crucial in accounting for several reasons:
- Accuracy Verification: This verifies the accuracy of the accounting records by ensuring that all adjusting entries have been correctly made and the books are ready to prepare financial statements.
- Financial Statement Preparation: It is a starting point for preparing financial statements. This includes the income statement, statement of retained earnings, and balance sheet.
- Internal Control: It aids in internal control processes by identifying and rectifying errors before financial statements are produced and shared with external parties.
Advantages of Adjusted Trial Balance:
- Accurate Financial Reporting: By incorporating adjusting entries, it ensures that financial statements are based on accurate and up-to-date information. Thus, improving the reliability of financial reporting.
- Transparent Financial Position: It provides a transparent view of the business’s financial position. Thus, reflecting adjustments for events that occurred but may not have been recorded during the regular accounting cycle.
- Facilitates Decision-Making: Reliable financial statements derived from the adjusted trial balance support effective decision-making. This is by providing management and stakeholders with a clear understanding of the company’s financial performance.
Disadvantages of Adjusted Trial Balance:
- Complexity: The process of adjusting entries can be complex. This is especially true for businesses with numerous transactions and intricate accounting requirements.
- Time-Consuming: The additional steps involved in adjusting entries may extend the accounting cycle. Thus, leading to delays in reporting financial information.
- Subjectivity: Adjusting entries involves judgment and estimates, introducing an element of subjectivity that may vary among accountants or organizations.
Example of Adjusted Trial Balance for a Wholesaler or Retailer Business:
Consider a retailer that follows the accrual basis of accounting and has a fiscal year ending on December 31. At the end of the year, the retailer needs to adjust entries for accrued salaries and unearned revenue.
- Accrued Salaries Adjustment:
- Adjusting Entry: Debit Salary Expense, Credit Accrued Liabilities.
- Example Amounts: Debit $5,000, Credit $5,000.
- Unearned Revenue Adjustment:
- Adjusting Entry: Debit Unearned Revenue, Credit Revenue.
- Example Amounts: Debit $2,000, Credit $2,000.
After these adjusting entries are made in the general ledger, the adjusted trial balance is prepared. It would include these adjusted amounts for Salary Expenses, Accrued Liabilities, Unearned Revenue, and Revenue. It ensures that these adjustments are reflected accurately before preparing financial statements. The totals of debits and credits while adjusting trial balance must match, verifying the accuracy of the adjustments made.
