Once all of the adjusting entries have been posted to the
general ledger, we are ready to start working on preparing the
adjusted trial balance. Preparing an adjusted trial balance is the
sixth step in the accounting cycle. An adjusted trial
balance is a list of all accounts in the general ledger,
including adjusting entries, which have nonzero balances. This
trial balance is an important step in the accounting process
because it helps identify any computational errors throughout the
first five steps in the cycle.
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.
Once all ledger accounts and their balances are recorded, the
debit and credit columns on the adjusted trial balance are totaled
to see if the figures in each column match. The final total in the
debit column must be the same dollar amount that is determined in
the final credit column.
Let’s now take a look at the adjusted T-accounts and adjusted
trial balance for Printing Plus to see how the information is
transferred from these T-accounts to the adjusted trial balance. We
only focus on those general ledger accounts that had balance
adjustments.
For example, Interest Receivable is an adjusted account that has
a final balance of $140 on the debit side. This balance is
transferred to the Interest Receivable account in the debit column
on the adjusted trial balance. Supplies ($400), Supplies Expense
($100), Salaries Expense ($5,100), and Depreciation
Expense–Equipment ($75) also have debit final balances in their
adjusted T-accounts, so this information will be transferred to the
debit column on the adjusted trial balance. Accumulated
Depreciation–Equipment ($75), Salaries Payable ($1,500), Unearned
Revenue ($3,400), Service Revenue ($10,100), and Interest Revenue
($140) all have credit final balances in their T-accounts. These
credit balances would transfer to the credit column on the adjusted
trial balance.
Once all balances are transferred to the adjusted trial balance,
we sum each of the debit and credit columns. The debit and credit
columns both total $35,715, which means they are equal and in
balance.
After the adjusted trial balance is complete, we next prepare
the company’s financial statements.
THINK IT THROUGH
Cash or Accrual Basis Accounting?
You are a new accountant at a salon. The salon had previously
used cash basis accounting to prepare its financial records but now
considers switching to an accrual basis method. You have been
tasked with determining if this transition is appropriate.
When you go through the records you notice that this transition
will greatly impact how the salon reports revenues and expenses.
The salon will now report some revenues and expenses before it
receives or pays cash.
How will change positively impact its business reporting? How
will it negatively impact its business reporting? If you were the
accountant, would you recommend the salon transition from cash
basis to accrual basis?
CONCEPTS IN PRACTICE
Why Is the Adjusted Trial Balance So Important?
As you have learned, the adjusted trial balance is an important
step in the accounting process. But outside of the accounting
department, why is the adjusted trial balance important to the rest
of the organization? An employee or customer may not immediately
see the impact of the adjusted trial balance on his or her
involvement with the company.
The adjusted trial balance is the key point to ensure all debits
and credits are in the general ledger accounts balance before
information is transferred to financial statements. Financial
statements drive decision-making for a business. Budgeting for
employee salaries, revenue expectations, sales prices, expense
reductions, and long-term growth strategies are all impacted by
what is provided on the financial statements.
So if the company skips over creating an adjusted trial balance
to make sure all accounts are balanced or adjusted, it runs the
risk of creating incorrect financial statements and making
important decisions based on inaccurate financial information.