The adjusted trial balance is a key step in the accounting cycle. It is a report run at the end of an accounting period after adjusting entries have been made in the company’s books.
Where the Adjusted Trial Balance Fits in the Accounting Cycle
In the process of preparing period-end financial statements, a company follows a series of steps. These steps, known as the accounting cycle, begin with recording business transactions and end with the completion of the financial statements.
The adjusted trial balance is prepared after adjusting entries are recorded and before financial statements are finalized.
The Trial Balance
At the end of an accounting period, a company runs a report called the trial balance. This report presents all the debit and credit entries made in the accounting period. The total of the debit entries must equal the total of the credit entries, otherwise a mistake has been made in one or more of the accounting entries.
Adjusting Entries
Most accounting entries correspond to an external transaction. For example, if a company sells a good or service and receives immediate payment. For accounting purposes, the company recognizes this transaction at the time of sale. Certain transactions, however, require future adjustments. These adjustments, called adjusting entries, are made at the end of an accounting period after the trial balance has been run.
Adjusting entries are made for three primary purposes:
- To record unrecognized revenue
- To record unrecognized expenses
- To modify an asset’s accounting value
Depreciation as an Adjusting Entry
As an example of an adjusting entry, consider a company that purchases a piece of machinery. The machine is an asset because it is expected to provide economic benefit in future periods. Tangible, long-term assets such as machinery are depreciated, meaning the asset’s carrying value is reduced over time. The entry to depreciate the asset is an adjusting entry and is made at the end of each accounting period.
The Adjusted Trial Balance
After the adjusting entries have been made, the company runs the adjusted trial balance. Like the first trial balance, the adjusted trial balance can help identify any numerical errors in the entries that would lead to an inequality in the total of debits and credits.
Why the Adjusted Trial Balance Matters
The adjusted trial balance ensures that revenues and expenses are properly recorded before financial statements are prepared.
It helps confirm:
- Debits equal credits
- Revenues are recognized in the correct period
- Expenses are matched appropriately
- Asset values reflect necessary adjustments
Accurate financial reporting depends on this step in the accounting cycle.
