Besides recording everyday transactions, accurate financial reporting also requires making certain adjustments in accounting. Specifically, companies should include accrued revenue, outstanding expenditures, depreciation, prepaid expenses, and many others. This is because the adjusted trial balance is needed for presenting the final result, which shows the real financial condition of a company. In other words, adjusted trial balance can be considered as a necessary tool for checking whether all the accounts are in balance after making adjustments. Therefore, for small businesses, professional bookkeeping and accounting are important.
In particular, accurate bookkeeping is necessary for making adjustments to account balances. Otherwise, business owners might experience problems while preparing financial reports. That is why in this blog post we will discuss what is adjusted trial balance, how it can be prepared, what kind of adjusting entries might be included in adjusted trial balance, and why it is important for accurate financial reporting.
What Is an Adjusted Trial Balance?
Adjusted Trial Balance is an accounting report generated once all adjustments have been made, recorded and posted into the correct accounting ledger accounts. It is very important to understand what the adjusted trial balance entails and the reasons for it.
Definition and Purpose of an Adjusted Trial Balance
An adjusted trial balance is a document which contains the balances of the general ledger accounts of a business entity after posting all the required adjusting journal entries. The accounts contained in this trial balance include assets, liabilities, equity, revenue, and expenses accounts, among others, together with their respective debit or credit balances.
The main reason behind the adjusted trial balance is to give up-to-date balances of accounts for the preparation of financial statements. This is because adjustments are made to ensure revenues and expenses appear in the correct accounting periods according to the accounting framework used. It is a useful mathematical tool as well.
Why Adjusting Entries Are Necessary
Sometimes, there may be instances where the receipt or payment of cash does not occur simultaneously with the occurrence of a revenue or expense transaction. The difference between the starting balances in the accounts and what the correct amount for the period should have been results in accounting situations like accruals, deferrals, depreciation, and others.
Adjusting entries are made to ensure that such timing differences are accounted for. For instance, it may happen that an employee has earned his wages but the wages are not yet paid. There may also be instances when some part of the insurance policy is consumed, which had been previously recorded as a prepaid item.
Adjusted vs. Unadjusted Trial Balance
An unadjusted trial balance is usually done before the recording of period-end adjustments. This will act as the base by providing the current balances of all the accounts found in the ledger.
The adjusted trial balance is made after posting of the adjustments. Comparison of the two will give insights on how the financial position was affected by the accruals, deferrals, depreciation, and other adjustments.
How to Prepare an Adjusted Trial Balance
The process of preparing an adjusted trial balance is carried out in a well-defined order, which includes analyzing accounts, making adjustments when required, recording journal entries, and then confirming the totals. Taking care to follow each step can minimize errors before producing financial statements.
Start With the Unadjusted Trial Balance
This is done based on the trial balance without adjustment. The trial balance contains the account balances taken from the general ledger. It is analyzed for the presence of unusual balances, incomplete data, or the need for any adjustment at the end of the accounting period.
Then the company analyzes its source documents, including bank statements, invoices, payrolls, contracts, fixed assets lists, among other pertinent documents. It enables determining the amount of revenues or expenses earned or incurred but not yet recognized or requiring distribution over several periods.
Record and Post Adjusting Entries
After the needed adjustments are determined, the accountants record the adjusting entries in the journal. Examples of some of these include accrual of salaries, accrual of revenues, adjustment of prepaid expenses, and depreciation of assets.
These adjusting entries are then recorded in the appropriate accounts in the general ledger. It depends on the adjustment made if one account will be affecting the income statement, while the other will be affecting the balance sheet.
Prepare and Verify the Adjusted Trial Balance
Following the posting of all adjustments, the new balances of all accounts are taken and used to prepare the adjusted trial balance. The accounts are allocated to the respective debit or credit columns depending on their final balances.
These two amounts need to match, and if they do not, the accountant has to scrutinize the accounting entries for the problem. Even when these two amounts match, further scrutiny is required since a trial balance that matches does not necessarily imply accuracy of the entries.
Common Adjustments and Their Impact on Financial Reporting
Changes have the potential to greatly influence revenues, expenditures, assets, and liabilities. Knowing which changes happen frequently can help business owners know why there may be differences between their financial statements and the trial balance at first.
Accrued Revenue and Accrued Expenses
An accrued revenue is the income earned but has not yet been collected or recorded. In recording an accrued revenue, one must record the revenue in the accounting period in which the revenues are earned together with the receivable account or any other account.
Accrued expenses are the exact opposite of accrued revenues. The company might have incurred expenses like salaries, interest, or utility bills, but the company has not paid for these expenses.
Depreciation and Prepaid Expenses
The depreciation adjustment shows the allocation of the cost of a fixed asset over time. Instead of expensing the total cost immediately on purchase of an asset, the depreciation allows the apportionment of costs for the periods benefiting from the use of the asset.
A further adjustment will have to be made for the prepaid expenses. Prepaid expenses arise where a company has paid in advance for insurance or rents. The first entry will be made in the prepaid asset account. As the company benefits from it, the cost will be charged to an expense account.
Interpreting the Final Balances
When the trial balance is completed, the information in the adjusted trial balance serves as the basis for preparing the financial statements. The revenue and expense accounts provide information for the income statement, whereas the assets, liabilities, and equity accounts usually end up on the balance sheet.
The information contained in the adjusted trial balance may also serve the managers in their assessment of profitability, liabilities, resources, and other financial trends. Analysis of the changes in comparison with the information in the unadjusted trial balance may prove to be quite revealing.
Role of Professional Bookkeeping and Outsourced Accounting Services
Accurate adjustments demand precise bookkeeping and knowledge of accounting. Businesses that do not have accountants within their organization can employ the services of professionals to improve their period-end accounting.
How Bookkeeping Services Support Accuracy
These professional bookkeeping firms can maintain the ledger accounts, reconcile the accounting records, compile the supporting documentation, and find out which transactions need to be taken into consideration before closing the accounting period. Regular bookkeeping services provides a better platform for preparing the period-end adjusting entries for accountants.
Bookkeepers may assist in monitoring recurring expenses like salaries payable, subscriptions payable, prepaid accounts, and fixed assets. In maintaining their accounting records, companies will be able to minimize the last minute work needed to prepare the adjusted trial balance.
Benefits of Outsourced Accounting Services
The advantage of outsourced accounting services is that it allows business organizations to have accounting experts without necessarily having to hire a large number of finance professionals in their organization.
Another benefit of outsourcing is that it enables business owners to dedicate time to operations and customers rather than worrying about accounting tasks. Having accounting experts handle the accounting process ensures that there is a consistent process and no period-end adjustments are missed.
Why Businesses Should Review the Final Results
The adjusted trial balance should not just be considered a mere formality. Checking on the final balances would enable accountants to determine why there were any unexpected changes and confirm if there was adequate evidence for the adjustments made.
A professional examination may also aid in detecting problems prior to the preparation of the financial statements. It is always easier to fix the problem before preparing the reports than doing so afterwards.
Adjusted trial balance is a very essential stage in the accounting process because it helps to update all the accounts after adjusting journal entries. Some of the most common adjusting entries include accrued revenues, accrued expenses, depreciation, and prepaid expenses.
When it comes to businesses, accuracy in adjusting entries helps to improve financial reporting and makes it possible to come up with good financial decisions. It is very important for organizations to have their books well organized during the entire year.
Preparing accurate adjusting entries requires attention to detail and a strong understanding of accounting records. The Fino Partners provides professional bookkeeping and outsourced accounting services to help businesses maintain organized financial information and manage period-end accounting requirements.
