After adjusting entries are posted to the ledger and adjusting entries are recorded, an adjusted trial balance is compiled.
This is the second trial balance prepared during the accounting cycle. Its purpose is to verify the equality of debits and credits following the entry of adjusting entries into the company’s books.
The adjusted trial balance is a crucial financial statement that aids in ensuring the veracity of financial records and the dependability of financial statements. It is used to produce financial statements used by investors, creditors, and other stakeholders to evaluate the company’s financial performance.
Benefits of Adjusted Trial Balance
The adjusted trial balance is a crucial step in the accounting cycle, offering several key benefits that streamline the financial reporting process and ensure accuracy. Here are four primary advantages:
Accuracy of Financial Statements: The adjusted trial balance is the basis on which reliable financial statements are prepared. With the inclusion of adjusting entries, it rectifies any discrepancies or omissions that have been made while initially recording transactions. The adjustments include accruals, deferrals, depreciation, and other required adjustments to ensure that the financial statements accurately represent the financial position and performance of the company. Without an adjusted trial balance, the resulting financial statements would be inaccurate and misleading.
Verification of Debits and Credits: The adjusted trial balance, as in the case of the unadjusted trial balance, is a double-check on whether debits are equal to credits in the general ledger. With each transaction, at least two accounts are involved, and in all cases, debits balance credits. Thus, this balance ensures that the accounting equation holds. If debits and credits are not balanced in the adjusted trial balance, it indicates a mistake somewhere in the adjusting entries or initial recording of transactions, enabling accountants to find and rectify the error before it affects the financial statements.
Organization and Efficiency: The adjusted trial balance is a clear and structured overview of all general ledger accounts after adjustments. The structured format makes it easier to prepare financial statements. Accountants can easily pull the required information directly from the adjusted trial balance, saving time and effort in preparing the statements. This process saves time and minimizes errors.
Audit Trail and Control: The adjusted trial balance and the underlying adjusting entries leave a clean audit trail. The trail enables auditors and stakeholders to trace the numbers in the financial statements back to the original transactions.
This increases transparency and accountability, making it simple to detect any discrepancies or irregularities. The adjusted trial balance also enhances internal control by offering a checkpoint to ensure the accuracy and completeness of the accounting records prior to their use in preparing financial statements.
Steps Involved in Preparing Adjusted Trial Balance
The preparation of an adjusted trial balance requires multiple stages. First, the unadjusted trial balance is compiled by cataloguing all accounts and their balances as of a particular date. Then, modifying entries are recorded to reflect updated account balances. Journal entries are used to reflect the account to be adjusted, the amount of the adjustment, and the account used to register the adjustment.
After adjusting entries have been made, a new trial balance, the adjusted trial balance, is prepared. This statement contains the current balances of all accounts, including those that have been modified. The trial balance is used to create the financial statements, including the balance sheet, income statement, and cash flow statement.
