The trial balance is a list of all your business’ ledger accounts, and how much each of those accounts changed over a particular period of time. You may have also heard it referred to as a trial balance sheet as it should be one worksheet summarizing all of your activity for a certain period in time. You will not see a similarity between the 10-column worksheet and the balance sheet, because the 10-column worksheet is categorizing all accounts by the type of balance they have, debit or credit. If the debit and credit columns equal each other, it means the expenses equal the revenues.

That is because they just started business this month and have no beginning retained earnings balance. The trial balance information for Printing Plus is shown previously. If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000. Total expenses are subtracted from total revenues to get a net income of $4,665. If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. This net income figure is used to prepare the statement of retained earnings.

Income Statement and Balance Sheet

Adjusting journal entries are recorded to properly state the companies revenues, expenses, and balance sheet accounts at the end of a period. Once the company records all of the necessary adjusting entries, you have the adjusted trial balance, which is used to prepare the financial statements. Such uniformity guarantees that there are no unequal debits and credits that have been incorrectly https://business-accounting.net/ entered during the double entry recording process. However, a trial balance cannot detect bookkeeping errors that are not simple mathematical mistakes. To prepare the financial statements, a company will look at the adjusted trial balance for account information. From this information, the company will begin constructing each of the statements, beginning with the income statement.

• Both the unadjusted trial balance and the adjusted trial balance play an important role in ensuring that all of your accounts are in balance and financial statements will reflect the most accurate totals.
• There are two main types of adjusting entries that we explore further, deferrals and accruals.
• If you review the income statement, you see that net income is in fact $4,665.

This means that the normal balance for Accumulated Depreciation is on the credit side. Accumulated Depreciation will reduce the asset account for depreciation https://quick-bookkeeping.net/ incurred up to that point. The difference between the asset’s value (cost) and accumulated depreciation is called the book value of the asset.

What is the Purpose of Preparing an Unadjusted Trial Balance?

Sometimes, these two reports are prepared by combining into one report by showing unadjusted and adjusted balances. Before drafting or preparing the financial statements, it is good to have an overall review of the trial balance. This is to ensure that the items’ numbers are consistent with our understanding. https://kelleysbookkeeping.com/ 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.

5: Prepare Financial Statements Using the Adjusted Trial Balance

The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time. The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period. The statement of retained earnings is prepared before the balance sheet because the ending retained earnings amount is a required element of the balance sheet.

Adjusted trial balance vs Unadjusted trial balance

Then, these records are processed further to create summarized entries for all types of accounts including assets, liabilities, equity, revenue, and expenses. The adjusted trial balances are also used only with the double-entry bookkeeping systems and businesses using the single-entry bookkeeping systems do not create adjusted trial balances. 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. Likewise, while the adjusted trial balance is used as the basis for the preparation of financial statements, the unadjusted trial balance usually cannot be used for such purpose. This is due to the total balances in the unadjusted trial balance are usually understated or overstated.

What is a trial balance used for?

There is also a similarity between the adjusted and unadjusted trial balance in which the total of debit balances must equal the total of credit balances in both types of trial balance. Recall from Analyzing and Recording Transactions that prepaid expenses (prepayments) are assets for which advanced payment has occurred, before the company can benefit from use. As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense. Some common examples of prepaid expenses are supplies, depreciation, insurance, and rent.

Before posting any closing entries, you want to make sure that your trial balance reflects the most accurate information possible. Multi-period and departmental trial balance reports are available as well. Sage 50cloudaccounting offers three plans; Pro, which is $278.98 annually, Premium, which runs $431.95 annually, and Quantum, with pricing available from Sage. The next step in the accounting cycle would be to
complete the financial statements. After incorporating the adjustments above, the adjusted trial balance would look like this.