4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance

Preparing an Adjusted Trial Balance

After you've journalized and posted all adjusting entries, the next step in the accounting cycle is preparing an adjusted trial balance. This document lists every account in the general ledger along with its updated balance. It serves two purposes: confirming that debits still equal credits, and providing the organized data you'll need to prepare financial statements.

The adjusted trial balance differs from the unadjusted trial balance because it includes the effects of adjusting entries for things like accrued revenues, accrued expenses, prepaid expenses, unearned revenues, and depreciation. Those adjustments bring your books in line with accrual accounting, which requires recognizing revenues when earned and expenses when incurred, regardless of when cash changes hands.

Preparation of the Adjusted Trial Balance

Before you build the adjusted trial balance, all adjusting entries for the period must already be journalized and posted to the ledger. Typical adjusting entries include:

• Accrued revenues and expenses (e.g., interest revenue earned but not yet received, salaries expense incurred but not yet paid)
• Prepaid expenses and unearned revenues (e.g., reducing Prepaid Insurance as coverage expires, recognizing Unearned Service Revenue as services are performed)
• Depreciation (e.g., recording Depreciation Expense and increasing Accumulated Depreciation)

Once those entries are posted, every ledger account reflects its end-of-period balance under accrual accounting. You then list each account and its balance in the adjusted trial balance format, which has a debit column and a credit column. The result is a complete, up-to-date snapshot that feeds directly into the income statement, statement of owner's equity, and balance sheet.

Transferring Balances to the Trial Balance

Here's how to move balances from the ledger into the adjusted trial balance:

1. Go to each ledger account (or T-account). Debits are on the left side, credits are on the right.
2. Calculate the account's ending balance. Add up each side, then subtract the smaller total from the larger total. The balance falls on whichever side is larger. For example, if an account has $5{,}000$ in total debits and $3{,}200$ in total credits, the ending balance is a $1{,}800$ debit.
3. Enter the balance in the correct column. Debit balances go in the debit column; credit balances go in the credit column.
4. Include every account in the general ledger, even accounts that were only created or affected by adjusting entries. Commonly overlooked accounts include Interest Receivable, Wages Payable, Prepaid Rent, Unearned Ticket Revenue, and Accumulated Depreciation.

Verification of Debit-Credit Equality

Because of double-entry bookkeeping, every transaction affects at least two accounts with equal debits and credits. That means the adjusted trial balance must have equal column totals. Here's how to verify:

1. Sum all amounts in the debit column.
2. Sum all amounts in the credit column.
3. Compare the two totals.
   • If they're equal, the adjusted trial balance is in balance. You can proceed to financial statement preparation.
   • If they're unequal, there's an error somewhere that needs to be found and fixed before moving on.

Common errors that cause an imbalance:

• Omitting an account or leaving out its balance entirely
• Posting to the wrong side, such as debiting Accounts Payable when it should have been credited
• Arithmetic mistakes when footing (totaling) a T-account or adding the trial balance columns
• Transposition errors, like writing $540$ instead of $450$

Keep in mind that a balanced adjusted trial balance doesn't guarantee everything is perfect. Certain errors won't cause an imbalance, such as posting the correct amount to the wrong account (e.g., debiting Utilities Expense instead of Rent Expense). Both sides still balance, but the individual account balances are wrong. That's why careful review of each adjusting entry matters, not just checking the totals.