How to Prepare an Adjusted Trial Balance (With Example)

Updated August 27, 2023

Balancing financial records is an important part of the accounting cycle that gives companies necessary information about their transactions. Financial teams often use adjusted and unadjusted trial balances to recognize and correct any errors in their records at the end of a cycle. Understanding the importance of adjusting the trial balances and how to do it can help you advance your career in accounting, finance, or business management.

In this article, we define what an adjusted trial balance is, define double-entry accounting, explore the purpose of adjusting trial balance, explain how to organize a company's financial position, and provide an example of a business balance sheet.

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What is an adjusted trial balance?

An adjusted trial balance, also known as a financial position, is an internal document that financial teams use to summarize all balances after they've made all the adjustments of an accounting cycle. It's not a document they usually include in a company's financial statements, though it provides useful information about profits, losses, cash flow, and expenses. Companies that use manual accounting may use this method to balance their transactions across accounts.

Related: Complete Guide to Understanding a Post-Closing Trial Balance

What is double-entry accounting?

Adjusting the trial balances may utilize double-entry accounting to account for both the debits and credits of moving money between accounts. Double-entry accounting is a method that records every business transaction using two book entries. When you use double-entry accounting, you can clearly see how a company's money moves between accounts during an accounting period. Here are the two transactions you might use in double-entry accounting:

  • Debit: describes money going into an account

  • Credit: refers to when money goes out of an account

Accountants record both debits and credits to balance accounts. For example, when a business pays rent on a property, the accountant may record a $1,500 credit from the cash account and a $1,500 debit into the property assets account. When you enter all transactions in this manner, you can balance the assets against the cash for a more accurate representation of a company's financial standing.

The purpose of adjusting the trial balance

The purpose of adjusting the company's trial balance sheet is to create a record of the transactions a business made during one accounting cycle. To accomplish this, you can take the balances for each account and remove transactions that occurred outside of the accounting cycle. Adding these adjustments to a company's trial balance sheet gives you a more accurate representation of the company's financial transactions that you can then use to create formal financial statements. Some accountants use software to improve the accuracy and efficiency of balancing accounts and creating financial statements based on their accounting cycles.

How to create an adjusted trial balance

Here are the steps you can take to prepare financial statements:

1. Record all transactions

Before you balance the accounts, it's important to review the ledger to ensure you have a record of all transactions of money or assets moving between the accounts. Having records of all transactions can make it easier to correct the balance sheet. When using the double-entry accounting method, record all transactions as credits and debits. If you have a discrepancy between the two, you can refer to the records to correct the transactions.

Related: What Is a Balance Sheet? FAQs, Components, and an Example

2. Run an unadjusted trial balance

The unadjusted trial balance is the initial summary of the balances of the accounts. This gives you an overview of the debits and credits of each account, providing the basis of the company's financial statements. The difference between the adjusted and unadjusted balances is that the unadjusted trial balance doesn't specify transactions by the accounting cycle.

To run an unadjusted trial balance, calculate the total debits and credits by adding the balances of debits for each account, followed by the credits for each account. When the totals of debits match the total of credits, you have a balanced financial account. For example, when the company spent $5,500 in credits, it also has accumulated $5,500 in assets. If these totals don't balance, evaluate the company's accounts for where you may have only recorded an entry once and correct it. You can use the difference between the totals to help you identify where the error may have occurred.

Related: How to Calculate Net Profit Margin (With Examples)

3. Make adjustments to the balance

Once you complete the unadjusted balance, you can make your adjustments by removing all transactions that occurred outside the timeframe of the accounting cycle for which you're preparing statements. By making these adjustments, you can improve the accuracy of the financial statements you create from the balance sheet. Here are the four main types of adjustments you can make to a trial balance sheet:

  • Deferrals: This is when you remove a transaction that doesn't belong in the accounting cycle for which you're balancing. For example, if a business received a late payment that applies to another cycle, you can add it to the previous cycle's balance sheet.

  • Accruals: An accrual is a payment incurred during the accounting cycle that the company hasn't yet paid. For example, if you know there's another round of payroll due at the end of the period, you might adjust this on the trial balance.

  • Missing transactions: These are transactions that you haven't recorded at the time the company may have made a transaction. For example, if an employee made a business purchase on a personal credit card and hasn't submitted the receipt for reimbursement, you may adjust the trial balance to accommodate.

  • Tax adjustments: These adjustments help you add tax deductions to the financial transactions. If the company hasn't paid the tax expense by the time you're applying the adjustments, you might add a credit to the company's tax payable account.

Related: Differences Between Public Accounting and Private Accounting

4. Run your financial position

The adjusted balance reflects only transactions occurring in the accounting cycle for which you're preparing statements. Once you have made these adjustments, you can add the debits together to find the total debits, followed by the addition of the credits to find the total credits. As with the unadjusted trial balance, the total debits match the total credits if you have properly balanced the sheet. By redoing these calculations, you can ensure you entered the adjustments accurately. If the totals don't match, you can review the adjustments you made to find your errors and correct them.

5. Post your closing entries

As the trial balance sheets are internal documents and not included in a company's financial documents, you can post your closing entries in the ledger. Closing entries are journal entries that you record to return the temporary accounts to zero before the beginning of a new accounting cycle. Accountants do this to keep transactions organized by cycle, giving them a clear understanding of a company's earnings for a specific period.

Temporary accounts are those that only carry funds for the accounting period, whereas permanent accounts are those in which a business accumulates funds across accounting cycles. Here are some examples of temporary accounts that you can zero out before the beginning of the next accounting cycle:

  • Revenue

  • Expenses

  • Income summary

  • Drawing or dividends account

6. Transfer the funds

You can post the closing entries by entering transactions that zero out the amounts from temporary accounts and moving the funds into permanent accounts. This helps you calculate how much money a business has made in one accounting period by keeping cash flow separate from the retained earnings until you balance the accounts.

For corporations, accountants may transfer the amounts to a retained earnings account. This is a permanent account that accumulates the amount of cash the business didn't spend in the previous accounting cycles. For sole proprietorships or partnerships, you might transfer the amounts to the capital account. The capital account is a permanent account that tracks the money the owners invest in their business and their retained earnings. Depending on the accounting software you use, it may automatically post these closing entries at the end of the company's accounting cycle.

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Small business balance sheet example

You can format the adjusted balance sheet exactly like an unadjusted trial balance. You may use three columns to display the account names, their debits, and credits. If completed properly, the debits and credits totals are equal and balanced. Here is an example of an unadjusted trial balance for a small business:

Oak Tree Inc.
Unadjusted trial balance
January 1 - March 31, 2022

Account Name: Debit/Credit/Cash: $2,950
Accounts receivable: $575
Office supplies: $40
Prepaid insurance: $120
Equipment: $2,120
Equipment depreciation: $35 Accounts payable: $30 Salaries payable: $418
Unearned revenue: $100
Dividends: $1,000
Sales Revenue: $6,848
Supplies expenses: $173
Equipment depreciation expense$35
Salaries expense: $418
Total: $7,431
In this unadjusted trial balance, to balance the totals, the accountant entered each transaction as a debit and a credit. When balancing the books, the accountant made an adjustment to account for a prepaid rent expense that had been previously unrecorded. The following adjusted balance shows an accurate representation of the transactions for each account:

Oak Tree Inc.
Adjusted trial balance
January 1 - March 31, 2022

Account Name: Debit/Credit/Cash: $2,950
Accounts receivable: $575
Office supplies: $40
Prepaid insurance: $120
Equipment: $2,120
Equipment depreciation: $35
Accounts payable: $30
Salaries payable: $418
Unearned revenue: $100
Dividends: $1,000
Sales Revenue: $6,848
Supplies expenses: $173
Equipment depreciation expense: $35
Salaries expense: $418
Rent expense: $2,000
Prepaid rent: $2,000 Total: $9,431

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