What is an extended trial   balance?

An extended trial balance is a standard trial balance to which are added columns extending to the right, and in which are listed the following categories:

1. Initial balances per general ledger. These are the account totals as of the end of the accounting period, as compiled from the general ledger. The total of all initial balance debits should equal the total of all initial balance credits.

2. Adjusting journal entries. These are journal entries to more closely align the reported results and financial position of a business to meet the requirements of an accounting framework, such as GAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts reported revenue and expense levels. See adjusting entries.

3. Income statement balances. These are the revenue, expense, gain, and loss accounts used to create the income statement.

4. Balance sheet balances. These are the asset, liability, and equity accounts used to create the balance sheet.

In all of the above columns, debit and credit amounts are listed in separate columns. Thus, there are eight columns in total, with two columns assigned to each of the preceding categories.

A variation on the format of the extended trial balance is to begin with initial balances, add or subtract adjusting journal entries, and finish with ending balances. This approach does not separate the ending balances into income statement and balance sheet accounts, and so provides somewhat less information to the reader; this is acceptable if the reader is not attempting to create an income statement or balance sheet from the trial balance.

The extended trial balance is extremely useful for creating a visual representation of where each of the accounts in the standard trial balance goes in the financial statements, which yields revenues, expenses, and profits for the reporting period, as well as asset, liability, and equity totals as of the end of the reporting period. Any computerized accounting system automatically generates financial statements from the trial balance, so the extended trial balance is not a commonly generated report in computerized systems.

Adjusting Entries

Adjusting entries are journal entries recorded at the end of an accounting period to alter the ending balances in various general ledger accounts. These adjustments are made to more closely align the reported results and financial position of a business with the requirements of an accounting framework, such as GAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts reported revenue and expense levels.

The use of adjusting journal entries is a key part of the period closing processing, as noted in the accounting cycle, where you convert a preliminary trial balance into a final trial balance. It is usually not possible to create financial statements that are fully in compliance with accounting standards without the use of adjusting entries.

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An adjusting entry can used for any type of accounting transaction; here are some of the more common ones:

To record depreciation and amortization for the period To record an allowance for doubtful accounts To record a reserve for obsolete inventory To record a reserve for sales returns To record the impairment of an asset To record an asset retirement obligation To record a warranty reserve To record any accrued revenue To record previously billed but unearned revenue as a liability To record any accrued expenses To record any previously paid but unused expenditures as prepaid expenses To adjust cash balances for any reconciling items noted in the bank reconciliation

As shown in the preceding list, adjusting entries are most commonly of three types, which are:

Accruals. To record a revenue or expense that has not yet been recorded through a standard accounting transaction.

Deferrals. To defer a revenue or expense that has been recorded, but which has not yet been earned or used.

Estimates. To estimate the amount of a reserve, such as the allowance for doubtful accounts or the inventory obsolescence reserve.

When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or liability account. For example, if you accrue an expense, this also increases a liability account. Or, if you defer revenue recognition to a later period, this also increases a liability account. Thus, adjusting entries impact the balance sheet, not just the income statement.

Since adjusting entries so frequently involve accruals and deferrals, it is customary to set up these entries as reversing entries. This means that the computer system automatically creates an exactly opposite journal entry at the beginning of the next accounting period. By doing so, the effect of an adjusting entry is eliminated when viewed over two accounting periods.

A company usually has a standard set of potential adjusting entries, for which it should evaluate the need at the end of every accounting period. You should have a list of these entries in the standard closing checklist. Also, consider constructing a journal entry template for each adjusting entry in the accounting software, so there is no need to reconstruct them every month.

Adjusting Entry Examples

Depreciation: Arnold Corporation records the $12,000 of depreciation associated with its fixed assets during the month. The entry is:

  Debit Credit

Depreciation expense 12,000  

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     Accumulated depreciation   12,000

Allowance for bad debts: Arnold Corporation adds $5,000 to its allowance for doubtful accounts. The entry is:

  Debit Credit

Bad debts expense 5,000  

     Allowance for doubtful accounts   5,000

Accrued revenue: Arnold Corporation accrues $50,000 of earned but unbilled revenue. The entry is:

  Debit Credit

Accounts receivable - accrued 50,000  

     Sales   50,000

Billed but unearned revenue: Arnold Corporation bills a customer for $10,000, but has not yet earned the revenue, so it creates an adjusting entry to record the billed amount as a liability. The entry is:

  Debit Credit

Sales 10,000  

     Unearned sales (liability)   10,000

Accrued expenses: A supplier is late in sending Arnold Corporation a materials-related invoice for $22,000, so the company accrues the expense. The entry is:

  Debit Credit

Cost of goods sold (expense) 22,000  

     Accrued expenses (liability)

  22,000

Prepaid assets: Arnold Corporation pays $30,000 toward the next month's rent. The company records this as a prepaid expense. The entry is:

  Debit Credit

Prepaid expenses (asset) 30,000  

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     Rent expense   30,000

 

What is a reversing   entry?

A reversing entry is a journal entry made in an accounting period, which reverses selected entries made in the immediately preceding accounting period. The reversing entry typically occurs at the beginning of a reporting period. A reversing entry is commonly used in situations when either revenue or expenses were accrued in the preceding period, and you do not want the accruals to remain in the accounting system for another period.

It is extremely easy to forget to manually reverse an entry in the following period, so it is customary to designate the original journal entry as a reversing entry in the accounting software when you create it. This is done by clicking on a "reversing entry" flag.  The software then automatically creates the reversing entry for you in the following accounting period.

Example of a Reversing Journal Entry

To explain the concept, the following entry shows an expense accrual in January for an $18,000 expense item for which the supplier's invoice has not yet arrived:

  Debit Credit

 Expense  18,000  

      Accrued expenses   18,000

You now create the following reversing entry at the beginning of the February accounting period. This leaves the original $18,000 expense in the income statement in January, but now creates a negative $18,000 expense in the income statement in February.

  Debit Credit

 Accrued expenses  18,000  

      Expense   18,000

But we are not done yet. The supplier's invoice arrives later in February, and we record it with the following entry, which offsets the negative $18,000 that would otherwise have appeared in the company's income statement in February:

  Debit Credit

 Expense  18,000  

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      Accounts payable   18,000

The result is that the $18,000 expense appears in the company's income statement in January, which is presumably when it was supposed to appear under the accrual basis of accounting, while there is no net recognition of any expense at all in February. Thus, a reversing entry has allowed us to properly record an expense during the period when the expense was incurred, rather than in a later period, when the company obtains the supplier's invoice.

Two further examples of how to use a reversing entry are:

Accrued revenue. You accrue $10,000 of revenue in January, because the company has earned the revenue but has not yet billed it to the customer. You expect to invoice the customer in February, so you create a reversing entry in the beginning of February to reverse the original $10,000 revenue accrual. The final billing, for a total of $12,000, is completed later in the month. The net result is the recognition of $10,000 in revenue in January, followed by the recognition of an additional $2,000 of revenue in February.

Accrued expenses. You accrue a $20,000 expense in January for a supplier invoice that did not arrive in time for the month-end close. You expect the invoice to arrive a few days after you close the month, so you create a reversing entry in early February for $20,000. The invoice arrives, and you record it in February. The net result is the recognition of a $20,000 expense in January, with no net additional expense recognition in February.

What if you were to forget to make a reversing entry? In the first example, this means that the accounting records would already show $10,000 of revenue that was recorded in January, and will then show an additional $12,000 of revenue in February, so that revenue is overstated by $10,000 through the two-month period. The key indicator of this problem will be an accrued account receivable of $10,000 that the accounting staff should eventually spot if it is regularly examining the contents of its asset accounts.

If you were to forget to reverse the expense in the second example, the accounting records would show a $20,000 expense in January and another $20,000 expense in February, where the February amount is erroneous. The key indicator of this problem will be an accrued liability of $20,000 that the accounting staff should locate if it is periodically examining the contents of the company's liability accounts.

If you expect to keep an accrual for a long period of time before reversing it, then make note of the accrual in the journal entry records, and review it as part of every month-end closing process until you can reverse it. This is also a good reason to conduct account reconciliations for all balance sheet accounts at regular intervals, which will detect unreversed entries.

Accrual Basis

Definition: Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred. The accrual basis requires the use of allowances for sales returns, bad debts, and inventory obsolescence, which are in advance of such items actually

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occurring. An example of accrual basis accounting is to record revenue as soon as the related invoice is issued to the customer.

The alternative method for recording accounting transactions is the cash basis.

Accruals Concept

Accrual Definition

An accrual is a journal entry that is used to recognize revenues and expenses that have been earned or consumed, respectively, and for which the related cash amounts have not yet been received or paid out. Accruals are needed to ensure that all revenues and expenses are recognized within the correct reporting period, irrespective of the timing of the related cash flows. Without accruals, the amount of revenue, expense, and profit or loss in a period will not necessarily reflect the actual level of economic activity within a business.

Accruals are a key part of the closing process used to create financial statements under the accrual basis of accounting; without accruals, financial statements are considerably less accurate.

Under the double-entry bookkeeping system, an accrued expense is offset by a liability, which appears in a line item in the balance sheet. If accrued revenue is recorded, it is offset by an asset, such as unbilled service fees, which also appears as a line item in the balance sheet.

It is most efficient to initially record most accruals as reversing entries. By doing so, the accounting software in which they are entered will automatically cancel them in the following reporting period. This is a useful feature when you are expecting to issue an invoice to a customer or receive an invoice from a supplier in the following period. For example, a business may know that a supplier invoice for $20,000 will arrive a few days after the end of a month, but the controller wants to close the books as soon as possible. Accordingly, he records a $20,000 reversing entry to recognize the expense in the current month. In the next month, the entry reverses, creating a negative $20,000 expense that is offset by the arrival and recordation of the supplier invoice.

Accrual Examples

Examples of accruals that a business might record are:

Expense accrual for interest. A local lender issues a loan to a business, and sends the borrower an invoice each month, detailing the amount of interest owed. The borrower can record the interest expense in advance of invoice receipt by recording accrued interest.

Expense accrual for wages. An employer pays its employees once a month for the hours they have worked through the 26th day of the month. The employer can accrue all additional wages earned from the 27th through the last day of the month, to ensure that the full amount of the wage expense is recognized.

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Expense accrual for supplier goods and services. A supplier delivers goods at the end of the month, but is remiss in sending the related invoice. The company accrues the estimated amount of the expense in the current month, in advance of invoice receipt.

Sales accrual. A services business has a number of employees working on a major project for the federal government, which it will bill when the project has been completed. In the meantime, the company can accrue revenue for the amount of work completed to date, even though it has not yet been billed.

Other Accrual Issues

If a business records its transactions under the cash basis of accounting, then it does not use accruals. Instead, it records transactions only when it either pays out or receives cash. The cash basis yields financial statements that are noticeably different from those created under the accrual basis, since timing delays in the flow of cash can alter reported results. For example, a company could avoid recognizing expenses simply by delaying its payments to suppliers. Alternatively, a business could pay bills early in order to recognize expenses sooner, thereby reducing its short-term income tax liability.

What are accrued   expenses?

An accrued expense is an expense that has been incurred, but for which there is not yet any expenditure documentation.

In place of the expenditure documentation, a journal entry is created to record an accrued expense, as well as an offsetting liability (which is usually classified as a current liability in the balance sheet). In the absence of a journal entry, the expense would not appear at all in the entity's financial statements in the period incurred, which would result in reported profits being too high in that period.

In short, accrued expenses are used to increase the accuracy of the financial statements, so that expenses are more closely aligned with those revenues with which they are associated.

A prepaid expense is the reverse of an accrued expense, since a liability is being paid before the underlying service or asset has been consumed. Consequently, a prepaid asset initially appears on the balance sheet as an asset.

Accrued Expenses in Practice

Examples of expenses that are are commonly accrued include:

Interest on loans, for which no lender invoice has yet been received Goods received and consumed or sold, for which no supplier invoice has yet been

received Services received, for which no supplier invoice has yet been received Taxes incurred, for which no invoice from a government entity has yet been received Wages incurred, for which payment to employees has not yet been made

An example of an accrued expense is a situation where a company receives office supplies from a supplier near the end of a month, but has not yet received an invoice from the supplier

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by the time the company closes its books for the month. To properly record this expense in the month of receipt, the accounting staff records an expense in the supplies expense account with a debit in the amount that it expects to be billed by the supplier, and records a credit to an accrued expenses liability account. Thus, if the amount of the office supplies were $500, the journal entry would be a debit of $500 to the office supplies expense account and a credit of $500 to the accrued expenses liability account.

The journal entry is normally created as an automatically reversing entry, so that the accounting software automatically creates an offsetting entry as of the beginning of the following month. Then, when the supplier eventually submits an invoice to the entity, it cancels out the reversed entry.

To continue with the preceding example, the $500 entry would reverse in the following month, with a credit to the office supplies expense account and a debit to the accrued expenses liability account. The company then receives the supplier invoice for $500, and records it normally through the accounts payable module of the accounting software, resulting in a debit to the office supplies expense account and a credit to the accounts payable account. The net result in the following month is therefore no new expense recognition at all, with the liability for payment shifting to the accounts payable account.

Realistically, the amount of an expense accrual is only an estimate, and so is likely to be somewhat different from the amount of the supplier invoice that arrives at a later date. Consequently, there is usually a small additional amount of expense or negative expense recognition in the following month, once the journal entry reversal and the amount of the supplier invoice are netted against each other.

From a practicality perspective, immaterial expenses are not accrued, since it requires too much work to create and document the related journal entry.

Examples of Accrued Expense Journal Entries

Office supplies received and there is no supplier invoice as of month-end: Debit to office supplies expense, credit to accrued expenses.

Employee hours worked but not paid as of month-end: Debit to wages expense, credit to accrued expenses.

Benefit liability incurred and there is no supplier invoice as of month-end: Debit to employee benefits expense, credit to accrued expenses.

Income taxes are accrued based on income earned. Debit to income tax expense, credit to accrued expenses.

The first three entries should reverse in the following month. Income taxes are typically retained as accrued expenses until paid.

What is an over   accrual?

An over accrual is a situation where the estimate for an accrual journal entry is too high. This estimate may apply to an accrual of revenue or expense. Thus, an over accrual of revenue will result in an excessively high profit in the period in which the journal entry is recorded, while

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an over accrual of an expense will result in a reduced profit in the period in which the journal entry is recorded.

An accrual is usually set up as a reversing entry, which means that the exact opposite of the original entry is recorded in the accounting system at the beginning of the next accounting period. When an over accrual is recorded in one period, this means that the reversing entry causing the reverse effect applies in the next accounting period. Thus:

If there is an over accrual of $500 of revenue in January, then revenue will be too low by $500 in February.

If there is an over accrual of $1,000 of an expense in January, then the expense will be too low by $1,000 in February.

An over accrual is not good from the perspective of the auditor, since it implies that a company's accounting staff is not able to properly estimate the amounts of revenues and expenses for which it is creating accruals.

The presence of over accruals can be combatted by only making an accrual entry when the amount to be recorded is easily calculated. If the amount is subject to fluctuation, the most conservative figure should be recorded.

Example of an Over Accrual

ABC International's accounting staff estimates that the amount of its phone bill for the month of April will be $5,500, which is based on a recent history of approximately that amount per month over the past few months. The accounting staff accordingly creates the following entry, which it sets up as an automatically reversing entry:

  Debit Credit

Telephone expense 5,500  

      Accrued expenses (liability)   5,500

At the beginning of the next month (May), the accounting system generates a reversing entry, which is:

  Debit Credit

Accrued expenses (liability) 5,500  

      Telephone expense   5,500

Finally, later in May, the phone company sends ABC the April phone bill in the amount of $4,250. The invoice is reduced because of a combination of a rate decrease and ABC having fewer land lines in use. The entry is:

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  Debit Credit

Telephone expense 4,250  

      Accounts payable   4,250

Thus, ABC initially creates an accrual of $5,500 that exceeds the actual amount of the expense by $1,250. The over accrual creates $1,250 too much expense in April, and $1,250 too little expense in May.

What is an under   accrual?

An under accrual is a situation where your estimate of the amount of an accrual journal entry is too low. This scenario can arise for an accrual of either revenue or expense. Thus, an under accrual of an expense will result in more profit in the period in which the entry is recorded, while an under accrual of revenue will result in less profit in the period in which the entry is recorded.

An accrual is typically created as a reversing entry in the accounting software, so that the opposite of the original entry is recorded at the beginning of the following accounting period; this flushes the effect of the entry from the financial statements over the course of two reporting periods. This also means that an under accrual in one period leads to the reverse effect in the next accounting period. Thus:

If there is an under accrual of $2,000 of revenue in April, then revenue will be too high by $2,000 in May.

If there is an under accrual of $4,000 of an expense in April, then the expense will be too high by $4,000 in May.

Auditors are always watching for potential under accruals of expenses, on the grounds that this creates too great a profit in the period being compiled, reviewed, or audited.

Example of an Under Accrual

ABC International's accounting staff estimates that the billing from a key materials supplier will be $50,000 based on the amount of goods shipped to the company during the past month (April). The accounting staff uses this estimate to create a cost of goods sold accrual for $50,000, and sets it up as an automatically reversing entry, as follows:

  Debit Credit

Cost of goods sold expense 50,000  

      Accrued expenses (liability)   50,000

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At the beginning of the next month (May), the accounting system generates a reversing entry, which is:

  Debit Credit

Accrued expenses (liability) 50,000  

      Cost of goods sold expense   50,000

Later in May, the supplier sends ABC its April invoice for $60,000. The invoice is higher than expected, because ABC's accounting staff did not account for a large delivery from the supplier. The entry is:

  Debit Credit

Cost of goods sold expense 60,000  

      Accounts payable   60,000

Thus, ABC initially creates an accrual of $50,000 that is lower than the actual amount of the cost of goods sold by $10,000. The under accrual creates $10,000 too much profit in April, and $10,000 too much expense in May.

Where do accruals appear on the balance   sheet?

The vast majority of accruals are for expenses. You record an accrued expense when you have incurred the expense but have not yet recorded a supplier invoice (probably because you have not yet received the invoice).

Accrued expenses tend to be extremely short-term, so you would record them within the current liabilities section of the balance sheet. Here are examples of accrued expenses and the accounts in which you would record them:

Interest accrual is recorded with a credit to the interest payable account Payroll tax accrual is recorded with a credit to the payroll taxes payable account Wage accrual is recorded with a credit to the wages payable account

If you have several small accruals, it may be acceptable to record them all within an "other liabilities" account. You should not record any accruals in the accounts payable account, since that is reserved for trade payables that are usually posted to the account through the accounts payable module in your accounting software.

A less common accrual is for revenue. You record accrued revenue when you have earned revenues from a customer, but have not yet billed the customer (once you bill the customer, the sale is recorded through the billing module in your accounting software). Accrued revenue

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situations may last for several accounting periods, until the appropriate time to invoice the customer. Nonetheless, accrued revenue is characterized as short-term, and so would be recorded within the current assets section of the balance sheet. The entry for accrued revenue is typically a credit to the sales account and a debit to an accrued revenue account. Do not record any revenue accruals in the accounts receivable account, since that is reserved for trade receivables that are usually posted to the account through the billings module in your accounting software.

You should always create accrual journal entries so that they automatically reverse themselves in the next accounting period. Otherwise, there is a strong likelihood that they will remain on the balance sheet long after they should have been removed.

Auditors will review any accruals on the balance sheet above a certain minimum size, so be sure to maintain detailed supporting documentation containing the reasons why you have recorded them.

The Trial Balance | Example | Format

The Trial Balance and its Role in the Accounting Process

The trial balance is a report run at the end of an accounting period, listing the ending balance in each account. The report is primarily used to ensure that the total of all debits equals the total of all credits, which means that there are no unbalanced journal entries in the accounting system that would make it impossible to generate accurate financial statements. The year-end trial balance is typically asked for by auditors when they begin an audit, so that they can transfer the account balances on the report into their auditing software; they may ask for an electronic version, which they can more easily copy into their software.

Even when the debit and credit totals stated on the trial balance equal each other, it does not mean that there are no errors in the accounts listed in the trial balance. For example, a debit could have been entered in the wrong account, which means that the debit total is correct, though one underlying account balance is too low and another balance is too high. For example, an accounts payable clerk records a $100 supplier invoice with a debit to supplies expense and a $100 credit to the accounts payable liability account. The debit should have been to the utilities expense account, but the trial balance will still show that the total amount of debits equals the total number of credits.

The trial balance can also be used to manually compile financial statements, though with the predominant use of computerized accounting systems that create the statements automatically, the report is rarely used for this purpose. In effect, there is no longer a need to use the trial balance report in accounting operations.

When the trial balance is first printed, it is called the unadjusted trial balance. Then, when the accounting team corrects any errors found and makes adjustments to bring the financial statements into compliance with an accounting framework (such as GAAP or IFRS), the report is called the adjusted trial balance. The adjusted trial balance is typically printed and stored in the year-end book, which is then archived. Finally, after the period has been closed, the report is called the post-closing trial balance.

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The trial balance is strictly a report that is compiled from the accounting records. However, since adjusting entries may be made as a result of reviewing the report, it could be said that trial balance accounting encompasses the adjustment process that converts an unadjusted trial balance into an adjusted trial balance.

If there are subsidiaries in an organization that report their results to a parent company, the parent may request an ending trial balance from each subsidiary, which it uses to prepare consolidated results for the entire company.

The general ledger is the report preferred by internal accountants, since it also shows the detailed transactions that comprise the ending balance. This additional level of detail reveals the activity in an account during an accounting period, which makes it easier to conduct research and spot possible errors.

Trial Balance Format

The initial trial balance report contains the following columns:

1. Account number2. Account name3. Ending debit balance (if any)4. Ending credit balance (if any)

Each line item only contains the ending balance in an account. All accounts having an ending balance are listed in the trial balance; usually, the accounting software automatically blocks all accounts having a zero balance from appearing in the report.

The adjusted version of a trial balance may combine the debit and credit columns into a single combined column, and add columns to show adjusting entries and a revised ending balance (as is the case in the following example).

Example of a Trial Balance

The following trial balance example combines the debit and credit totals into the second column, so that the summary balance for the total is (and should be) zero. Adjusting entries are added in the next column, yielding an adjusted trial balance in the far right column.

ABC International Trial Balance August 31, 20XX

  UnadjustedTrial Balance

AdjustingEntries

Adjusted Trial Balance

Cash $60,000   $60,000

Accounts receivable 180,000 50,000 230,000

Inventory 300,000   300,000

Fixed assets (net) 210,000   210,000

Accounts payable (90,000)   (90,000)

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Accrued liabilities (50,000) $(25,000) (75,000)

Notes payable (420,000)   (420,000)

Equity (350,000)   (350,000)

Revenue (400,000) (50,000) (450,000)

Cost of goods sold 290,000   290,000

Salaries 200,000 25,000 225,000

Payroll taxes 20,000   20,000

Rent 35,000   35,000<

Other expenses 15,000   15,000

Total $0 $0 $0

What is an unadjusted trial   balance (preliminary trial balance)

The unadjusted trial balance is the listing of general ledger account balances at the end of a reporting period, before any adjusting entries are made to the balances to create financial statements. The unadjusted trial balance is used as the starting point for analyzing account balances and making adjusting entries. This report is a standard one that can be issued by many accounting software packages. It can also be manually compiled.

If a company creates financial statements on a monthly basis, the accountant would print an unadjusted trial balance at the end of each month to initiate the process of creating financial statements. Alternatively, if the company only creates financial statements once a quarter, one would print the unadjusted trial balance on a quarterly basis.

In a computerized accounting system, it may not even be apparent that an unadjusted trial balance is available; instead, the accountant may simply work from the general ledger report, and adjust it as necessary to create financial statements.

An unadjusted trial balance is only used in double entry bookkeeping, where all account entries must balance. If a single entry system is used, it is not possible to create a trial balance where the sum of all debits equals the sum of all credits.

Example of a Trial Balance

In the following example, the unadjusted trial balance is the first column of numbers, while the second column of numbers contains an adjusting entry; the final column combines the first two columns, creating the adjusted trial balance. Debit balances (for assets and expenses) are listed as positive numbers, and credit balances (for liabilities, equity, and revenue) as negative numbers; the debits and credits exactly offset each other, so the total always equals zero.

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In an alternative format, the unadjusted trial balance may have a separate column for all debit balances and a separate column for all credit balances. This is useful for ensuring that the total of all debits equals the total of all credits.

ABC Company Trial Balance June 30, 20XX

  UnadjustedTrial Balance

AdjustingEntries

Adjusted Trial Balance

Cash $60,000   $60,000

Accounts receivable 180,000   180,000

Inventory 300,000   300,000

Fixed assets (net) 210,000   210,000

Accounts payable (90,000)   (90,000)

Accrued liabilities (50,000) $(25,000) (75,000)

Notes payable (420,000)   (420,000)

Equity (350,000)   (350,000)

Revenue (400,000)   (400,000)

Cost of goods sold 290,000   290,000

Salaries 200,000 25,000 225,000

Payroll taxes 20,000   20,000

Rent 35,000   35,000<

Other expenses 15,000   15,000

Total $0 $0 $0

The adjusting entry in the example is for the accrual of salaries that were unpaid as of the end of June.

What is an adjusted trial   balance?

An adjusted trial balance is an unadjusted trial balance to which adjusting entries have been added. The intent of adding these entries is to correct errors in the initial version of the trial balance and to bring the entity's financial statements into compliance with an accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards.

Once all adjustments have been made, the adjusted trial balance is essentially a summary-balance listing of all the accounts in the general ledger - it does not show any detail transactions that comprise the ending balances in any accounts. The adjusting entries are

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shown in a separate column, but in aggregate for each account; thus, it may be difficult to discern which specific journal entries impact each account.

The adjusted trial balance is not part of the financial statements - rather, it is an internal report that has two purposes:

To verify that the total of the debit balances in all accounts equals the total of all credit balances in all accounts; and

To be used to construct financial statements (specifically, the income statement and balance sheet; construction of the statement of cash flows requires additional information).

The second application of the adjusted trial balance has fallen into disuse, since computerized accounting systems automatically construct financial statements. However, it is the source document if you are manually compiling financial statements. In the latter case, the adjusted trial balance is critically important - financial statements cannot be constructed without it.

Example of an Adjusted Trial Balance

The following report shows an adjusted trial balance, where the initial, unadjusted balance for all accounts is located in the second column from the left, various adjusting entries are noted in the third column from the left, and the combined, net balance in each account is stated in the far right column.

ABC InternationalTrial BalanceJuly 31, 20XX

  UnadjustedTrial Balance

AdjustingEntries

Adjusted Trial Balance

Cash $60,000   $60,000

Accounts receivable 180,000 50,000 230,000

Inventory 300,000   300,000

Fixed assets (net) 210,000   210,000

Accounts payable (90,000)   (90,000)

Accrued liabilities (50,000) $(25,000) (75,000)

Notes payable (420,000)   (420,000)

Equity (350,000)   (350,000)

Revenue (400,000) (50,000) (450,000)

Cost of goods sold 290,000   290,000

Salaries 200,000 25,000 225,000

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Payroll taxes 20,000   20,000

Rent 35,000   35,000<

Other expenses 15,000   15,000

Total $0 $0 $0

The adjusting entries in the example are for the accrual of $25,000 in salaries that were unpaid as of the end of July, as well as for $50,000 of earned but unbilled sales.

Trial balance   errors

The trial balance is a summary-level of listing of the debit or credit account total in each account. You normally use the initial, or unadjusted, trial balance for two reasons:

To ensure that the total of all debits equals the total of all credits, thereby ensuring that all of the underlying transactions are in balance.

To use as the starting point for adjusting entries that will bring the information in the trial balance into compliance with an accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards.

This unadjusted trial balance may contain a number of errors, only a few of which are easy to spot in the trial balance report format. Here are the more common errors, with suggestions on how to find them:

Entries made twice. If an entry is made twice, the trial balance will still be in balance, so that is not a good document for finding it. Instead, for an ongoing transaction, you may have to wait for the issue to resolve itself. For example, a duplicate invoice to a customer will be rejected by the customer, while a duplicate invoice from a supplier will (hopefully) be spotted during the invoice approval process.

Entries not made at all. Impossible to find on the trial balance, since it is not there (!). Your best bet is to maintain a checklist of standard entries, and verify that all of them have been made.

Entries to the wrong account. This may be apparent with a quick glance at the trial balance, since an account that previously had no balance at all now has one. Otherwise, the best form of correction is preventive - use standard journal entry templates for all recurring entries.

Reversed entries. An entry for a debit may be mistakenly recorded as a credit, and vice versa. This issue may be visible on the trial balance, especially if the entry is large enough to change the sign of an ending balance to the reverse of its usual sign.

Transposed numbers. The digits in a number may have been switched. This is easy to find, since the underlying entry is unbalanced, and so should not have been accepted by

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the accounting software. If a manual system is being used, journal entry totals must compared to the totals in the trial balance. This issue relates to the following one.

Unbalanced entries. This is listed last, since it is impossible in a computerized environment, where entries must be balanced or the system will not accept them. If you are using a manual system, then the issue will be apparent in the column totals of the trial balance. However, locating the exact entry is vastly more difficult, and will call for a detailed review of every entry, or at least of the totals in every subsidiary journal that rolls into the general ledger.

Whenever you correct an error, be sure to use a clearly labeled journal entry with supporting documentation, so that someone else can trace through your work at a later date.

What is a post-closing trial   balance?

A post-closing trial balance is a listing of all balance sheet accounts containing non-zero balances at the end of a reporting period. The post-closing trial balance is used to verify that the total of all debit balances equals the total of all credit balances, which should net to zero. This is one of the last steps in the period-end closing process.

The post-closing trial balance contains no revenue, expense, gain, loss, or summary account balances, since these temporary accounts have already been closed and their balances moved into the retained earnings account as part of the closing process.

Once you have ensured that the total of all debits and credits the report are the same number, set a flag to prevent additional transactions from being recorded in the old accounting period, and begin recording accounting transactions for the next accounting period.

If any revenue, expense, gain, loss, or summary account balances appear in the trial balance subsequent to the closing process, it is because they are associated with the next accounting period.

The post-closing trial balance contains columns for the account number, account description, debit balance, and  credit balance. It will likely not contain "Post Closing Trial Balance" in the header, since few accounting computer systems use this designation. Instead, it will use the standard "Trial Balance" report header.

Accounting software requires that your journal entries balance before it allows them to be posted to the general ledger, so it is essentially impossible to have an unbalanced trial balance. Thus, the post-closing trial balance is only useful if you are manually preparing accounting information. For this reason, most procedures for closing the books do not include a step for printing and reviewing the post-closing trial balance.

Example of a Post-Closing Trial Balance

Note that there are no temporary accounts listed in the following post-closing trial balance:

ABC Company Trial Balance June 30, 20XX

Account Account

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Number Description Debit Credit

1000 Cash $105,000  

1500 Accounts receivable 320,000  

2000 Inventory 500,000  

3000 Fixed assets 2,000,000  

3100 Accumulated depreciation (480,000)  

4000 Accounts payable   $195,000

4500 Accrued expenses   108,000

5000 Retained earnings   642,000

5500 Common stock   1,500,000

Totals $2,445,000 $2,445,000

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