Adjusted trial balance: Definition and examples

Understanding a business’s financial health is an essential part of management. Most of this is done through financial statements and financial ratios.

But financial statements and calculating ratios need to come from finalized, reviewed numbers. Part of the process of getting there is preparing an adjusted trial balance.

Learn what this document is, how to prepare one, and how to get the most value from this document in our comprehensive guide on adjusted trial balances.

What is an adjusted trial balance?

In double-entry accounting, an adjusted trial balance is the summation of all the accounts in your general ledger, adding up to their ending balance at a specific point in time. Crucially, this is after any adjusting journal entries are made, finalizing the account balances.

This document is also where you’ll confirm that the debits and credits are equal in an accounting period. If the two are equal, the books are considered to be “balanced.”

Definition and purpose of an adjusted trial balance

The adjusted trial balance is the final step of preparation before generating financial statements, mainly the balance sheet and income statement. Each line on a financial statement corresponds with a line on the adjusted trial balance.

For manual accounting processes, creating the adjusted trial balance is the finalization of the numbers for a period in time. This makes the document the source of truth that all financial reports are ultimately built off of.

What are adjusting entries?

To understand the adjusted trial balance, you need to understand adjusting entries. Adjusting entries are journal entries that account for non-monetary transactions.

An example of an adjusting entry is amortization. When a business pays upfront for something that provides value over time, it’s common to spread the cost over the months or years the value is provided.

Say you paid $1,200 for an annual subscription of a software. In this case, every month an adjusting entry would be made to account for the $100 monthly cost ($1,200 divided by 12) of the annual subscription.

The adjusting entry is made because there isn’t a corresponding financial transaction to account for this activity.

Importance of preparing an adjusted trial balance

The adjusted trial balance has three main purposes:

1. Account for non-monetary transactions: Costs aren’t limited to the dollars you spend. Adjusted trial balances capture the full scope of financial activity to ensure not a cost or revenue is unaccounted for.
2. Identify potential errors: Taking a quick scan of an adjusted trial balance highlights where mistakes may have been made. If a balance is higher or lower than anticipated or if the credits and debits don’t add up, it’s worth checking if there was a data entry error.
3. Finalizing financial statements: A completed adjusted trial balance is the final step before generating financial statements, the bedrock of financial reporting.

Generating an adjusted trial balance is one of the final steps in the accounting cycle. Once it’s complete and financial statements are generated, it’s time to close the books and start looking forward.

Differences between unadjusted and adjusted trial balances

There are two trial balances that occur in the accounting cycle: an unadjusted trial balance and an adjusted trial balance.

These two trial balances are always completed in the same order: the unadjusted trial balance comes before the adjusted trial balance.

This is because the adjusted trial balance builds off of the unadjusted trial balance. Once you’ve added adjusting entries to unadjusted trial balance, it becomes an adjusted trial balance.

For example, a business will complete an unadjusted trial balance that accounts for all of its financial transactions. Then it will create adjusting entries for things like accrued expenses, accrued revenue, depreciation, and amortization.

Once the adjusting entries are completed, the business now has a completed adjusted trial balance.

Below is a breakdown of the main differences between the two trial balances.

How to prepare an adjusted trial balance

Here’s the steps you need to take to go from an unadjusted trial balance to an adjusted trial balance.

1. Identify the adjustments that need to be made. The adjustments you need to make will reflect the unique makeup of your business and its financial activity.
2. Record each adjusting journal entry in your general ledger, debiting and crediting the appropriate accounts for the right amount. You may want to work with a financial professional to identify some values if it’s your first time going through the process.
3. Update account balances based on the journal entries you just created. This can be done by adding or subtracting the newly entered debits and credits as you go.
4. Generate the adjusted trial balance with the new account values. Confirm that the values are balanced by summing up the debits and credits to ensure they’re equal.

Once these steps are completed, you’re ready to generate financial statements with your finalized account balances.

Common adjustments to consider

The most common adjusting entries that businesses make when generating an adjusted trial balance are:

1. Accrued revenues: Sales revenue that is earned for goods or services but have not been billed or invoiced yet, like services that are billed on the 15th of every month.
2. Accrued expenses: Expenses that have been incurred but not yet paid, like wages earned by employees that have not yet been paid out as part of the payroll cycle.
3. Prepaid expenses: Expenses that have been paid up front and are provided over time, like an annual subscription or prepaid rent.
4. Unearned revenue: Sales payments that have been received before a good or service has been provided, such as deposits that are paid to guarantee the service.
5. Depreciation: The process of spreading the cost of a physical asset over its useful life, such as a delivery vehicle or manufacturing equipment.
6. Amortization: The process of spreading the cost of an intangible asset over its useful life, such as a patent or other intellectual property.
7. Bad debt expense: The cost of accounts receivable that are deemed uncollectible, which is a tax deductible expense if previously reported as income.
8. Adjusting for accrued taxes: Recording taxes (such as sales tax or income tax) that have been incurred, but not yet paid.

This is just a selection of common adjusting entries businesses make as part of their accounting processes and is by no means exhaustive. Specific industries or business types may have their own unique adjusting entries that reflect their needs.

Best practices for accuracy and efficiency

Whether you’re new to adjusted trial balances or you’re looking to refine your practices, be sure to follow these best practices:

1. Use a checklist: To guarantee you don’t miss a step, create a checklist that outlines all the adjustments you make as part of the process.
2. Review twice, generate once: You should always review the unadjusted trial balance before making adjusting entries and then review the adjusted trial balance when complete. This will help you isolate whether an error was made before or after adjusted entries were made.
3. Confirm each account is debit or credit: As a rule of thumb, assets should hold a debit balance and liabilities a credit balance. Then revenues should be credits and expenses debits. This holds true unless there’s a negative balance.
4. Clearly document adjustments: The journal entries you make should be detailed enough that you know its purpose at a glance. But also keep a running log of the adjustments you’re making so you can refer back and guarantee nothing is missed.
5. Use supporting documents: Some balances can be confirmed with external sources, such as referring to a bank statement to confirm a cash balance. For each adjustment made, there should be some form of supporting documentation like an amortization table for amortization adjustments.
6. When in doubt, work with a professional: An adjusted trial balance plays a massive role in your financial reporting, which in turn impacts tax filing, applying for credit, looking for investment, and more. Getting help when you need it will give you the model you need to follow to get accurate and compliant results.

Examples of adjusted trial balances

Lonnie’s Local Delivery is a one-person courier service. He has one vehicle that he uses to complete door-to-door deliveries in his area.

In his day-to-day operations, Lonnie’s main costs are the gas and maintenance costs for his vehicle. One major aspect of these costs he needs to account for is depreciation.

Lonnie has worked with his accountant to identify that his monthly depreciation amount should be $750.

He also takes prepayment for deliveries on future dates. He records these amounts as unearned revenue on the books. In January, he took a $500 payment for a delivery that will be completed in February.

At the end of his accounting period, Lonnie has following unadjusted trial balance:

At this point, Lonnie is ready to make the adjusting entries for depreciation and unearned revenue.

Starting with depreciation, he knows that he needs to account for $750 of depreciation per month. He creates the following journal entry, crediting the vehicle account and debiting the depreciation expense account.

Next, he tackles the unearned revenue of $500. He makes the following journal entry, debiting sales revenue and crediting unearned revenue.

With these adjusting entries complete, Lonnie can prepare the adjusted trial balance:

After making the adjusting entries, the debits and credits are still equal—an indication that the work was completed properly. 

Interpreting and analyzing an adjusted trial balance

An adjusted trial balance is a complete overview of all account balances in a given period of time making it a prime document to analyze and understand your business.

The first thing you should do with a completed adjusted trial balance is review the most important balances and compare them against past periods. Look at your cash balance to see whether it’s trending up or down, then check your top expense categories to understand whether they’re increasing over time.

Next, look at the categories that contain adjusting entries like depreciation or amortization expenses. Take time to understand how these impact your financial reporting and their importance. After all, these can save you real dollars on taxes.

Some of these insights will be verified with financial statements. It’s worthwhile to create hypotheses about how the month was before generating financial statements to see how much your assumptions align with the actual financial performance.

With each point, you should document your findings. Each insight has value, though sometimes it takes time for that value to become apparent. Reflecting back on an accounting period and learning from it will give you the best foundation for recreating the successes while avoiding repeating any hiccups.

Benefits of using an adjusted trial balance

Not only is an adjusted trial balance a regular practice in the accounting cycle, the process of generating one has multiple benefits for businesses.

Enhancing financial statement accuracy

Non-monetary transactions are just as important a part of financial reporting as monetary transactions. Not only do they give you a clearer vision of how your day-to-day operations impact the bottom line, but it keeps you up-to-date on potential tax deductible expenses.

For example, depreciation expenses are tax deductible. Tracking depreciation throughout the year helps with tax planning and working towards the smallest possible tax bill.

Identifying errors and discrepancies

You should feel confident in the values that are on your financial statements. Going through the process of generating an adjusted trial balance gives you the best chance of catching an error before it gets cemented in an income statement or balance sheet.

Creating an adjusted trial balance can also help you catch clerical errors or errors in data entry. Seeing all the balances laid out may help you catch something that’s higher or lower than anticipated and thus worth investigating.

Improving decision-making and financial planning

After creating an adjusted trial balance, you should compare it against past accounting periods. You’ll start to notice trends that could help define your future plans.

At a glance, you’ll get a clear image of what’s driving profitability and how that’s changing over time. You could catch an expense that’s getting out of hand or set budgets that maximize the money you keep in the business.

Adjusted trial balances also gain value over time, such as using them in year-over-year comparisons. Comparing an adjusted trial balance to one from a previous year helps you understand how the business has changed without seasonal trends influencing results.

Manage accounts with confidence and efficiency

An adjusted trial balance is important, but the activity that goes into every account balance is even more important. That’s why BILL offers a full suite of financial products for businesses to manage their expenses, revenues, and account balances without the manual labor.

From accounts receivables software that automates reminders and payment collection to BILL Spend & Expense, a budgeting and forecasting tool that helps you make and stick to a plan, you’ll feel more in control over your account balances.