What is an Adjusted Trial Balance?
Adjusted trial balances are prepared to correct errors in the initial trial balance and bring the financial statements into compliance with accounting frameworks such as GAAP and IFRS. These accounts are sometimes referred to as “corrected trial balances.”
Adjusted trial balance is the final summary-balance listing of all your assets, liabilities, and equity accounts to determine your firms’ financial condition. The preparation process adjusts for errors and omissions, resulting in balances in your general ledger accounts that are not correct. Adjusting entries are shown in an altogether separate column but are accumulated at the bottom of each account. This makes it easy to see the specific entries that impact each account at a glance.
When making adjustments to your trial balance, you can use four different avenues
- Deferrals adjust transaction amounts for transactions that occur before or after a period is being analyzed. For example, an advanced payment from a customer that occurs before an invoice is considered a deferral.
- Accruals are a form of accounting that allows you to prepare financial statements now for future money transactions that will happen in the future, such as rental payments.
- Missing transaction adjustments account for the transaction that is not recorded in your business’s books over a while.
- Tax adjustments are used to account for tax-related events. These include depreciation and other tax deductions.
Uses for the Adjusted Trial Balance
The adjusted trial balance summarizes the general-ledger account balances. It has two purposes-
- The trial balance is a summary of your financial status, and it’s used to verify that total debit balances equals the total of all credit balances. It’s an excellent way to catch accounting errors and confirm everything adds up.
- The aim of the Adjusted Trial Balance is to provide information for the preparation of financial statements. Specifically, they are used to construct the Income Statement and Balance Sheet and the Statement of Cash Flows.
The other application of the adjusted trial balance is quickly growing in popularity since the benefits of manual accounting are very clear. The adjusted trial balance is a cross-checking journal. It is a critical component for manually building financial statements. If you are using automated financial statements, the adjusted trial balance will not be used.
How does an adjusted trial balance get turned into financial statements?
Once you are done with the adjusted trial balance, creating financial statements is easy. By financial statements it means- the balance sheet, the cash flow statement, and the income statement.
- Using the information within the trial balance for revenue and expense, you can produce an income statement.
- You can create a balance sheet using information from the trial balance’s asset, liability, and equity accounts.
- In the final step of preparing financial statements, you can use information in any account that is interacting with the cash accounts in the trial balance to prepare a statement of cash flows.
Difference Between Trial Balance and Adjusted Trial Balance
Trial balances are prepared in advance for transactions with a specific objective, and they help prepare an unadjusted trial balance. Adjusted trial balances are created later, including the impact of all transactions on the earlier book balance.
A trial balance is a report of ledger account balances at a point in time. An adjusted trial balance is a report of general ledger account balances after adjusting entries have been made.
How to determine what is an Adjusted Trial Balance with Example
To determine what is an adjusted trial balance, follow these steps:
Look at the month of history for each account.
In each statement, look at the balance remaining at the end of the previous billing period and subtract any applicable adjustments.
Multiply each adjusted trial balance by the total number of months in the billing period to get an adjusted trial balance for the current month. For example, if there was a $10,000 balance remaining at the end of February in your checking account, but only $6,000 on March 20th, your adjusted trial balance for March 20th will be $5,000 (the entire $10,000 minus the $6,000 balance).