The adjusted trial balance is a trial balance prepared after all end-of-period adjustments have been taken into account. It becomes the basis for preparing accurate financial statements.
Effect of Adjustments
Every adjustment has a double effect, so the adjusted trial balance must still balance (total debits = total credits).
- Accrued expense — add to the expense (debit) and create a liability (credit).
- Prepaid expense — reduce the expense and create an asset (debit).
- Depreciation — depreciation expense (debit) and accumulated depreciation (credit).
- Provision for doubtful debts — shown as a credit.
Key idea
Adjusted expense = Trial balance figure ± adjustment. The adjusted trial balance must balance: total debits = total credits.
Example
Salaries in the trial balance are RM10,000. There are accrued salaries of RM1,000 at year end. In the adjusted trial balance, salaries (debit) become RM11,000 and accrued salaries of RM1,000 are shown as a credit (liability). Both effects keep the trial balance in balance.
Its Use
Figures from the adjusted trial balance are transferred directly into the trading account, the profit and loss account and the statement of financial position. This reduces errors because all adjustments are already built in.
How to Check
To prepare the adjusted trial balance, start with the balances in the original trial balance, then adjust each account involved. Every adjustment must have a matching debit and credit so that the two column totals stay equal. If the two columns do not balance after the adjustments, it signals that one side of an adjustment has been left out. The adjusted trial balance makes the final accounts easier to prepare because every figure is already updated in one place.
Remember
Prepaid items and accrued income are assets (debit); accrued expenses, prepaid income, accumulated depreciation and the provision for doubtful debts are credits.