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Adjusted Trial Balance: Difference Between Unadjusted And Adjusted Trial Balance

Referencing Styles : APA | Pages : 2

A trial balance is an internal document of an organisation which contains a list of all the assets and liabilities of the company for a given financial year. It is a T-shaped statement and is used to ensure that all the debits recorded by the entity match with their corresponding credits. It is not a financial statement that is prepared by the company for the usage of the public and the stakeholders. This is only an internal guide which is used by the company for the preparation of the financial statements. Before preparing the adjusted trial balance, it is mandatory to pass the adjusted journal entries which keep a record of the adjustments being made by the company. Sometimes, a trial balance may not match due to the existence of unadjusted amounts and errors in some of the ledger accounts recorded by the company. An adjusted trial balance is one which is prepared after making all the necessary adjustments to the ledger accounts. In the regular book form of accounting, a trial balance is prepared by a bookkeeper who has to make sure that the trial balance contains the balances of all the accounts maintained by the organisation. After this, the books are sent to the chief accountant who uses his knowledge of accountancy to pass adjusting entries which are necessary for balancing the books. The sums arrived at after making such adjustments are all added up to form the adjusted trial balance. In an organisation where a large number of transactions take place in a given day, there is a possibility of not finding the vouchers and other documents which support a transaction. In such instances, the difference amount is transferred to an account called the suspense account which is later written off after obtaining sufficient evidences to support the transactions.                        

Examples of Unadjusted Trial Balance

Apart from balancing the books, trial balance also gives an opportunity to rectify the mistakes made during the passing of journal entries and the transfer of such entries to the ledgers. For instance, it may so happen that the bookkeeper confused accounts receivable with accounts payable and transferred a certain amount of accounts receivable to the accounts payable account. This can be adjusted by passing a reverse entry for the amount by which the individual accounts are overstated and understated. Other errors like clerical, errors of omission, errors of commission and basic accounting errors are all rectified through the preparation of the trail balance and specifically the adjusted trial balance.  Some other examples of items which require adjustment entries are accrued expenses incurred but not paid, revenues recorded but not earned, deferral of payments and receipts for a future accounting date and adjustments related to previous items which become accrued in the current financial year. Suspense account is also highly helpful in keeping track of the amount that has not been able to be accounted in a given financial year and helps the accountant to keep note of the adjustments that are to be made in the future. While this account is used in case of frauds committed by the internal members of an organisation, major differences in the amount are a clear indicator of suspicious activity taking place within the business. Hence, proper internal controls are to be maintained to ensure that the suspense account is not being used to cover up any misdoings on the part of the company. Although it is evident that an unbalanced trial balance clearly indicates a mistake, it cannot be guaranteed that the adjusted trial balance is free of errors. The major limitation of the trial balance in any of its form is its dependence on the person who is preparing it. In case of any error committed twice by the person, the trial balance automatically adjusts itself without any scope to recognise the error other than physical examination and verification of records.

Differences between a trial balance and an adjusted trial balance

A regular trial balance or unadjusted trial balance is a document that contains the list of accounts maintained by an entity at the end of the financial year or reporting period and before the preparation of the financial statements. In many ways, this is the beginning of the process of analysing the annual accounts by the people in charge of the preparation of the financial statements. This is useful in indicating all the errors committed by the bookkeeper during the course of a financial year. This can either be compiled manually or through a report generated through a standard accounting software. If the unadjusted trial balance turns out to be error free, then there is no necessity for the preparation of the unadjusted trial balance. However, in most cases, errors happen in a trial balance and are found out by comparing both the credit and debit aspects of various accounts. In order to eliminate or adjust these errors and to ensure that the financial statements show a true and fair view of the financial statements of the entity, an adjusted trial balance is to be prepared. The chief purpose of the adjusted trial balance is to overcome all the deficiencies of the unadjusted trial balance and be more helpful in preparing the financial statements. Both the trial balance and the unadjusted trial balance can either be prepared on a monthly basis or an annual basis. It is of utmost importance that the organisation follows the double entry system of bookkeeping for the preparation of the trial balance. It would not be possible with an entity following a single entry system of bookkeeping.

Calculating retained earnings on an adjusted trial balance

Retained earnings are a part of or the entire amount of past profits which are held by a company for the purpose of paying dividends or for reinvesting it internally for the benefit of the stakeholders and the organisation as a whole. A separate financial statement called the statement of retained earnings is prepared to record the net changes in the retained earnings during the course of a year. As the adjusted trial balance contains the details of all the debit and credit balances of all accounts prepared during a year, the simplest method used for calculating the retained earnings is adding the net income of the current year to the previous year’s retained earnings and deducting the dividends paid by the entity during the year. Any prior period adjustments to the amount of retained earnings at the beginning of the year should be adjusted to start from the net retained earnings during the current financial year. In case of a change in the accounting policy by a company, the company should make necessary adjustments according to its new policy and change the retained earnings in the beginning of the year and make the required adjustments later. In case of a company having negative retained earnings during the beginning of the financial year, profits should be very high during the year to offset the negative retained earnings and be able to generate enough dividends to the shareholders for the current year.

Financial Statements

Financial statements are the documents which keep a record of the assets, liabilities, incomes, expenditure and the cash flows of an organisation during a specified period of time. There are various types of financial statements like the income statement, balance sheet, statement of retained earnings and the cash flow statement. The primary objective of preparing these statements is to provide its users with information relating to the financial performance of and health of a company for a financial year. After preparing the adjusted trial balance, the amounts shown in each of the accounts are transferred to the above mentioned financial statements according to the nature of the items. Items like salaries, wages, income from operations and other forms of income are all transferred to the income statement. Assets and liabilities are transferred to the balance sheet. Items which could not be accounted for in an appropriate manner during the preparation of the trial balance are transferred to the suspense account to balance the books on a temporary basis. Cash flow records all the cash transactions that a company enters into during the course of a year. It maintains a record of the cash generated through operating, financing and investing activities. The net cash flow is a good indicator of the present financial condition and the future prospects of the company. Statement of retained earnings maintains a record of the amount that is held back by the company and is used for the purpose of either paying dividends to the shareholders or to invest them back in the internal operating activities of the firm. A company with higher retained earnings generates confidence among both the shareholders and the prospective investors of a company. The difference between the assets and liabilities, which is arrived after taking into account all the activities of a firm is known as the net assets or the equity of the firm for a given period of time.

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