Preparation of adjusted trial balance is the sixth step of accounting cycle. This trial balance is prepared after taking into account all the adjusting entries prepared in 4th step of the accounting cycle. The main purpose of preparing an adjusted trial balance is to adjust the balances of ledger accounts so that they can provide correct information to complete the next steps of accounting cycle (i.e., preparation of financial statements).
In addition of being a tool for checking the mathematical accuracy of books of accounts, an adjusted trial balance provides enough information for the preparation of a number of mandatory financial statements such as income statement, balance sheet and statement of changes in equity. The preparation of statement of cash flows, however, requires a lot of additional information.
Financial statements drawn on the basis of this version of trial balance generally comply with major accounting frameworks, like GAAP and IFRS.
Adjusted trial balance is not a part of financial statements rather it is a statement or source document for internal use. It is mostly helpful in situations where financial statements are manually prepared. If the organization is using some kind of accounting software, the bookkeeper/accountant just need to pass the journal entries (including adjusting entries). The software automatically updates/adjusts the relevant ledger accounts and generates financial statements for the use of various stakeholders.
Format and methods of preparing adjusted trial balance
The format of adjusted trial balance is similar to that of an unadjusted trial balance. It has three columns. The first column is used to write account names or account titles, the second column is used to write debit amounts and the third column is used to write credit amounts. Adjusted trial balance is prepared using one of the two methods explained below:
First method – inclusion of adjusting entries into ledger accounts:
The first method is similar to the preparation of an unadjusted trial balance. But this time the ledger accounts are first adjusted for the end of period adjusting entries and then account balances are listed to prepare adjusted trial balance. This method is time consuming but is considered a more systematic method and is usually used by large companies where a lot of adjusting entries are prepared at the end of each accounting period.
Second method – inclusion of adjusting entries directly into unadjusted trail balance:
The second method is simple and fast but less systematic and is usually used by small companies where only a few adjusting entries are found at the end of accounting period. In this method, the adjusting entries are directly incorporated to the unadjusted trial balance to convert it to an adjusted trial balance.
Both the methods are in practice and produce the same result.
To exemplify the procedure of preparing an adjusted trial balance, we shall take an unadjusted trial balance and convert the same into an adjusted trial balance by incorporating some adjusting entries into it. To simplify the procedure, we shall use the second method in our example.
Marketing Consulting Service Inc. adjusts its ledger accounts at the end of each month. The unadjusted trial balance on December 31, 2015 and adjusting entries for the month of December are given below.
Unadjusted trial balance:
The adjusting entries for the first 11 months of the year 2015 have already been made.
Required: Prepare an adjusted trial balance of Marketing Consulting Service Inc. on December 31, 2015.
The accounts that have been affected as a result of making adjusting entries for the month of December are shown in red color in the adjusted trial balance. It is just for the purpose of explanation and you don’t need to change the color in your home work assignments or examination questions.