Adjusted Trial Balance Explained: Purpose, Format, Examples, and How It Supports Financial Statements
Adjusted Trial Balance Explained: Purpose, Format, Examples, and How It Supports Financial Statements
After recording adjusting entries, accountants need one final checkpoint before preparing the financial statements. This checkpoint is the adjusted trial balance.
An adjusted trial balance is a report that lists all ledger accounts and their balances after adjusting entries have been recorded, ensuring the books remain balanced before financial statements are prepared.
An adjusted trial balance updates the original trial balance by incorporating all adjusting entries made at the end of the accounting period. It ensures that every account reflects its correct balance before the income statement, balance sheet, and cash flow statement are prepared.
If you've already learned about the Trial Balance and Adjusting Entries, this article completes the next logical step in the accounting cycle.
Why the Adjusted Trial Balance Matters
The unadjusted trial balance only reflects transactions that have been recorded during the accounting period. However, many accounts require updates before financial statements can accurately represent the business. Examples include:
- Depreciation
- Accrued expenses
- Accrued revenue
- Prepaid expenses
- Unearned revenue
The adjusted trial balance confirms that these updates have been properly recorded while maintaining the equality of total debits and total credits.
- What Is an Adjusted Trial Balance?
- Where It Fits in the Accounting Cycle
- Components of an Adjusted Trial Balance
- Adjusted Trial Balance Format
- How to Prepare an Adjusted Trial Balance
- Worked Example
- Adjusted Trial Balance vs Trial Balance
- Common Errors It Can Reveal
- Real-World Example
- Common Mistakes
- Pro Tip
- Frequently Asked Questions
- Key Takeaways
What Is an Adjusted Trial Balance?
An adjusted trial balance is an internal accounting report prepared after all adjusting entries have been posted to the general ledger. It lists every account along with its updated debit or credit balance.
The main objective is to verify that the accounting records remain balanced before financial statements are prepared. Unlike the unadjusted trial balance, this version reflects the true financial position of the business at the reporting date.
Where It Fits in the Accounting Cycle
The adjusted trial balance comes immediately after adjusting entries and immediately before financial statement preparation.
| Step | Stage |
|---|---|
| 4 | Post to the General Ledger |
| 5 | Prepare an Unadjusted Trial Balance |
| 6 | Record Adjusting Entries |
| 7 | Prepare the Adjusted Trial Balance ← you are here |
| 8 | Prepare Financial Statements |
| 9 | Record Closing Entries |
| 10 | Prepare the Post-Closing Trial Balance |
Components of an Adjusted Trial Balance
A typical adjusted trial balance includes:
Account Name
Name of each ledger account.
Debit Balance
Updated debit amount.
Credit Balance
Updated credit amount.
Total Debits & Total Credits
The sum of all debit balances and the sum of all credit balances. The total debit column must always equal the total credit column.
Adjusted Trial Balance Format
| Account | Debit | Credit |
|---|---|---|
| Cash | $25,000 | |
| Accounts Receivable | $8,500 | |
| Prepaid Insurance | $900 | |
| Equipment | $40,000 | |
| Accumulated Depreciation | $5,000 | |
| Accounts Payable | $6,500 | |
| Salaries Payable | $2,000 | |
| Owner's Capital | $50,000 | |
| Service Revenue | $28,000 | |
| Rent Expense | $4,000 | |
| Insurance Expense | $300 | |
| Depreciation Expense | $1,000 | |
| Salaries Expense | $12,800 | |
| Total | $92,500 | $92,500 |
How to Prepare an Adjusted Trial Balance
Start with the Unadjusted Trial Balance
Use the balances from the trial balance prepared after posting journal entries.
Record Adjusting Entries
Post all month-end or year-end adjustments to the general ledger — accrued salaries, depreciation, prepaid expenses, unearned revenue, and accrued revenue.
Update Ledger Account Balances
Each affected ledger account now reflects its adjusted balance.
List Every Account
Transfer every updated ledger balance to the adjusted trial balance.
Verify Totals
Add both columns. If total debits equal total credits, the books remain mathematically balanced after adjustments.
Worked Example
A company pays $1,200 for annual insurance on 1 January. Initially:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | $1,200 | |
| Cash | $1,200 |
At the end of January, one month's insurance has expired. Adjusting Entry:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $100 | |
| Prepaid Insurance | $100 |
The adjusted trial balance now shows: Prepaid Insurance = $1,100, Insurance Expense = $100. This ensures that both the balance sheet and income statement reflect accurate figures for the reporting period.
Adjusted Trial Balance vs Trial Balance
Trial Balance
- Prepared before adjusting entries
- May contain incomplete account balances
- Used to identify posting errors
- Does not include period-end adjustments
Adjusted Trial Balance
- Prepared after adjusting entries
- Reflects updated balances
- Used to prepare financial statements
- Includes all period-end adjustments
Common Errors an Adjusted Trial Balance Can Reveal
Although the adjusted trial balance confirms that debits equal credits, it may still reveal issues such as:
- Incorrect adjustment amounts
- Missing adjusting entries
- Posting adjustments to the wrong accounts
- Mathematical errors in adjustments
Like the unadjusted trial balance, it cannot detect every accounting error — omissions and misclassifications can still slip through even when the columns balance.
Real-World Example
A property management company receives six months' rent in advance from a tenant. Initially, the payment is recorded as Unearned Revenue. At the end of each month, the accountant records an adjusting entry to recognize one month's rent as earned income. The adjusted trial balance reflects the reduced liability and increased revenue, ensuring that the financial statements accurately report the company's performance.
Common Mistakes
- Forgetting to post adjusting entries before preparing the adjusted trial balance
- Omitting newly created accounts such as Accrued Expenses or Depreciation Expense
- Assuming a balanced adjusted trial balance guarantees error-free financial statements
- Using outdated ledger balances after adjustments have been recorded
Pro Tip
Always compare the adjusted trial balance with the unadjusted version. Significant changes help identify the impact of month-end adjustments and make it easier to explain financial results to managers, auditors, or business owners.
Frequently Asked Questions
What is the purpose of an adjusted trial balance?
To verify that all account balances are correct after adjusting entries and before preparing financial statements.
Is the adjusted trial balance a financial statement?
No. It is an internal accounting report used as a preparation step for financial statements.
What comes after the adjusted trial balance?
The next step is preparing the financial statements, including the income statement, balance sheet, statement of changes in equity, and cash flow statement.
Can accounting software generate an adjusted trial balance automatically?
Yes. Most modern accounting software updates ledger balances after adjusting entries and can generate an adjusted trial balance instantly. However, accountants should still review the report for accuracy.
Key Takeaways
- An adjusted trial balance is prepared after adjusting entries are recorded.
- It lists every ledger account with its updated balance.
- Total debits must equal total credits.
- It serves as the foundation for preparing accurate financial statements.
- It is an essential quality-control step in the accounting cycle.
Preparing the Financial Statements
Now that you've learned how to prepare an adjusted trial balance, the next step is creating the financial statements. These reports transform accounting data into meaningful information that business owners, investors, lenders, and other stakeholders use to make informed decisions.
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About the Author
Ishara Vithana is a senior finance professional with over two decades of experience in accounting, bookkeeping, and small business finance. He is a Xero Certified Advisor and Partner, Dext Certified Expert, Fathom Advisor, and Tally Prime expert. Through Finance Made Simple, he helps small business owners and DIY bookkeepers understand accounting, bookkeeping, and business finance with practical, easy-to-follow guides. Connect with Ishara →
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