What is an adjusted trial balance Why is it prepared?

Purpose of an Adjusted Trial Balance

An adjusted trial balance is a financial report that summarizes the balances of all general ledger accounts after adjusting entries have been made. It is prepared to ensure that the financial statements for the period are accurate and up-to-date. Additionally, it corrects any errors to make the statements compatible with the requirements of an applicable accounting framework.

Key Facts

Purpose: The main purpose of preparing an adjusted trial balance is to ensure that the debit column totals match the credit column totals. It helps in verifying that the adjusting entries have been made correctly and provides a clearer picture of the company’s financial performance.
Preparation: An adjusted trial balance is prepared by listing the account names, debit column, and credit column. It looks similar to an unadjusted trial balance and can be prepared using two methods: recreating the t-accounts with adjusting entries or adding the adjustment amounts directly to the unadjusted trial balance.
Errors: If the debit and credit columns of the adjusted trial balance do not balance, it indicates that there may be errors in the adjusting entries or in the posting of those entries. Common errors include posting a debit amount as a credit amount or vice versa, incorrect balances in the t-accounts, and totaling the columns incorrectly.

Preparation of an Adjusted Trial Balance

An adjusted trial balance is prepared by following a similar format to other trial balances. It includes a heading with the company name, the title of the report, and the date of the reporting period at the top of the page. Three columns are used. The different account names are listed on the left-hand side, in the first column, and their debit and credit balances are listed in the second and third columns respectively. The accounts are listed in order of:

Assets
Liabilities
Equity
Income
Expenses

At the bottom of the table, the debit and credit columns are totaled. To agree with the accounting equation, they must be equal. If the totals of the two columns do not match each other, it means that there is an error.

There are two methods for preparing an adjusted trial balance:

Recreating the t-accounts with adjusting entries: This method involves creating new t-accounts for each account that has been adjusted. The adjusting entries are then posted to these new t-accounts, and the new balances are used to prepare the adjusted trial balance.
Adding the adjustment amounts directly to the unadjusted trial balance: This method is simpler than the first method. It involves adding the adjustment amounts to the appropriate accounts in the unadjusted trial balance. The resulting balances are then used to prepare the adjusted trial balance.

Errors in Adjusted Trial Balances

If the totals of the debit and credit columns of the adjusted trial balance do not balance, one of the following errors might have occurred:

A debit amount is erroneously posted as a credit amount or vice versa.
The balances of the t-accounts are incorrect.
The debit and credit columns of the adjusted trial balance have been totaled wrong.
One or more of the individual ledger account balances have not been listed in the trial balance report.
Duplication in the listing of one of the individual account balances.

Conclusion

An adjusted trial balance is an important financial report that is used to ensure the accuracy of the financial statements. It is prepared by listing the account names, debit column, and credit column. The debit and credit columns should balance, and any errors should be corrected before the financial statements are prepared.

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