An adjusted trial balance is a document that includes a list of a company’s ledger accounts and their balances. This, after making the corresponding adjustments.
That is, a trial balance includes all the company’s accounts with their respective amount, and after including some accounting facts that had not been recorded at the beginning.
To understand why these extraordinary adjustments exist, we must remember that accounting is based on the accrual principle. This is an accounting standard that establishes that transactions or economic events are recorded when they occur, regardless of the date of payment or collection.
To explain it more simply, income is recorded when it is generated, even if it has not been collected at that time in cash (think of a sale on credit). Similarly, an expense is recognized when it is incurred, even if no cash has been paid for the expense (think of fixed asset depreciation that involves an expense but not a cash outflow).
Then, taking into account this accrual principle, certain income and expenses must be recorded so that the company’s accounting faithfully reflects its economic situation.
How is an adjusted trial balance prepared?
To prepare an adjusted trial balance, you must have the list of the company’s accounting accounts. Thus, the first two columns will be considered with the resulting balances after registering the operations or transactions of the firm. This, considering the balances as debit or credit.
When it comes to a debit, it is noted on the debit. This is the part of the accounting entry where increases in assets and expense accounts are recorded, as well as decreases in liabilities, net worth and income accounts.
Likewise, the credits are recorded in the credit, where the increases in liabilities, equity and income accounts are recorded, as well as decreases in assets and expense accounts.
Two additional columns will then be added where the adjustments will be recorded and, finally, two columns where the balances will be shown after the inclusion of the adjustments. We will understand it better with an example.
Let’s look at an example of an adjusted trial balance:
To understand this example, let’s look at the case of machinery and equipment. Let us imagine that the company acquired its first machinery with a useful life of four years during the analysis period. To simplify the situation, we will say that each year the asset depreciates by a quarter, that is: 40,000/4=10,000.
To record the 10,000 euros of depreciation, in the adjustments columns, we will see that there is an increase in accumulated depreciation of 10,000 euros that corresponds to a depreciation expense of 10,000. This follows from an accounting entry such as the following:
Similarly, it happens with the interests generated by loans, the devaluation of inventories and the rent paid in advance that is accrued. The latter refers to the fact that a rent has been paid, for example, for one year, for 20,000 euros, and 6 months have passed. So, the company has been “spending” 10,000 on rent.