Lesson Objectives:- How the adjusted trial balance is used
- Finalizing the T-account balances
- Preparing the adjusted trial balance
Now that we've covered the five different categories of adjusting entries, let's move on to the fifth step of the accounting cycle, performing the adjusted trial balance.
This step is prepared after the adjusted entries are recorded. The adjusted trial balance must be performed before the final financial statements can be created.
A trial balance lists out all of the accounts and balances to ensure the debits are equal to the credits, in accordance with the double entry accounting system.
Let's look at our original trial balance, as the adjusted trial balance will be formatted in the exact same way. The only difference is that the adjusted trial balance reflects all of the adjusting entries, so that we can see the final balances of all accounts.
First, we will start by reviewing the full list of adjusting entries that we've outlined in the last five lessons.
You may be wondering: what do I need to do with the adjusting entries in order to prepare the adjusted trial balance? Well, you will need to update the balances of the original trial balances and add on any new accounts, in order to create the adjusted trial balance.
The adjusting entries that we reviewed were recorded after the trial balance was conducted, meaning we will first need to update the T-account balances, in order to record the adjusted trial balance.
As you can see, we've added a handful of accounts and entries to the T-accounts. Each account has the final balances listed at the bottom of the T-account.
Now let's move all of these balances to the adjusted trial balance. The T-accounts make it very easy to plug all of the information into the adjusted trial balance to ensure both sides equal out.
Take a look at the adjusted trial balance above; all of the new accounts and final balances have been transferred. Using the T-account accounts gives you an organized format to pull out each balance and list it on the appropriate debit or credit side.
The accounts are listed in order on the adjusted trial balance from assets to liabilities to equities.
After all of the balances are added up, you can see that the debits are equal to the credits.
The adjusted trial balance is created to give us the final balances of all accounts in order to prepare the financial statements in the next step of the accounting cycle. When we talk about financial statements in the next lesson, you will see how all of this information comes into play.