What is an extended trial balance?

An extended trial balance is a standard trial balance to which are added columns extending to
the right, and in which are listed the following categories:
1. Initial balances per general ledger. These are the account totals as of the end of the
accounting period, as compiled from the general ledger. The total of all initial
balance debits should equal the total of all initial balance credits.
2. Adjusting journal entries. These are journal entries to more closely align the reported
results and financial position of a business to meet the requirements of an accounting
framework, such as GAAP or IFRS. This generally involves the matching
of revenues to expenses under the matching principle, and so impacts reported revenue
and expense levels. See adjusting entries.
3. Income statement balances. These are the revenue, expense, gain, and loss accounts
used to create the income statement.
4. Balance sheet balances. These are the asset, liability, and equity accounts used to create
the balance sheet.
In all of the above columns, debit and credit amounts are listed in separate columns. Thus,
there are eight columns in total, with two columns assigned to each of the preceding categories.
A variation on the format of the extended trial balance is to begin with initial balances, add or
subtract adjusting journal entries, and finish with ending balances. This approach does not
separate the ending balances into income statement and balance sheet accounts, and so
provides somewhat less information to the reader; this is acceptable if the reader is not
attempting to create an income statement or balance sheet from the trial balance.
The extended trial balance is extremely useful for creating a visual representation of where
each of the accounts in the standard trial balance goes in the financial statements, which yields
revenues, expenses, and profits for the reporting period, as well as asset, liability, and equity
totals as of the end of the reporting period. Any computerized accounting system automatically
generates financial statements from the trial balance, so the extended trial balance is not a
commonly
generated
report
in
computerized
systems.

Adjusting Entries
Adjusting entries are journal entries recorded at the end of an accounting period to alter the
ending balances in various general ledger accounts. These adjustments are made to more
closely align the reported results and financial position of a business with the requirements of
an accounting framework, such as GAAP or IFRS. This generally involves the matching of
revenues to expenses under the matching principle, and so impacts reported revenue and
expense levels.
The use of adjusting journal entries is a key part of the period closing processing, as noted in
the accounting cycle, where you convert a preliminary trial balance into a final trial balance. It
is usually not possible to create financial statements that are fully in compliance with
accounting standards without the use of adjusting entries.

An adjusting entry can used for any type of accounting transaction; here are some of the more
common ones:

To record depreciation and amortization for the period

To record an allowance for doubtful accounts
To record a reserve for obsolete inventory
To record a reserve for sales returns
To record the impairment of an asset
To record an asset retirement obligation
To record a warranty reserve
To record any accrued revenue
To record previously billed but unearned revenue as a liability
To record any accrued expenses
To record any previously paid but unused expenditures as prepaid expenses
To adjust cash balances for any reconciling items noted in the bank reconciliation

As shown in the preceding list, adjusting entries are most commonly of three types, which are:

Accruals. To record a revenue or expense that has not yet been recorded through a
standard accounting transaction.
Deferrals. To defer a revenue or expense that has been recorded, but which has not yet
been earned or used.
Estimates. To estimate the amount of a reserve, such as the allowance for doubtful
accounts or the inventory obsolescence reserve.

When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or
liability account. For example, if you accrue an expense, this also increases a liability account.
Or, if you defer revenue recognition to a later period, this also increases a liability account.
Thus, adjusting entries impact the balance sheet, not just the income statement.
Since adjusting entries so frequently involve accruals and deferrals, it is customary to set up
these entries as reversing entries. This means that the computer system automatically creates an
exactly opposite journal entry at the beginning of the next accounting period. By doing so, the
effect of an adjusting entry is eliminated when viewed over two accounting periods.
A company usually has a standard set of potential adjusting entries, for which it should
evaluate the need at the end of every accounting period. You should have a list of these entries
in the standard closing checklist. Also, consider constructing a journal entry template for each
adjusting entry in the accounting software, so there is no need to reconstruct them every month.
Adjusting Entry Examples
Depreciation: Arnold Corporation records the $12,000 of depreciation associated with its fixed
assets during the month. The entry is:
Debit
Depreciation expense

Credit

12,000

Accumulated depreciation

12,000

Allowance for bad debts: Arnold Corporation adds $5,000 to its allowance for doubtful
accounts. The entry is:
Debit
Bad debts expense

Credit

5,000

Allowance for doubtful accounts

5,000

Accrued revenue: Arnold Corporation accrues $50,000 of earned but unbilled revenue. The
entry is:
Debit

Credit

Accounts receivable - accrued 50,000

Sales

50,000

Billed but unearned revenue: Arnold Corporation bills a customer for $10,000, but has not yet
earned the revenue, so it creates an adjusting entry to record the billed amount as a liability.
The entry is:
Debit
Sales

Credit

10,000

Unearned sales (liability)

10,000

Accrued expenses: A supplier is late in sending Arnold Corporation a materials-related invoice

for $22,000, so the company accrues the expense. The entry is:
Debit
Cost of goods sold (expense)
Accrued
(liability)

Credit

22,000

expenses

22,000

Prepaid assets: Arnold Corporation pays $30,000 toward the next month's rent. The company
records this as a prepaid expense. The entry is:
Debit
Prepaid expenses (asset)

Credit

30,000

Rent expense

30,000

What is a reversing entry?

A reversing entry is a journal entry made in an accounting period, which reverses selected
entries made in the immediately preceding accounting period. The reversing entry typically
occurs at the beginning of a reporting period. A reversing entry is commonly used in situations
when either revenue or expenses were accrued in the preceding period, and you do not want the
accruals to remain in the accounting system for another period.
It is extremely easy to forget to manually reverse an entry in the following period, so it is
customary to designate the original journal entry as a reversing entry in the accounting
software when you create it. This is done by clicking on a "reversing entry" flag. The software
then automatically creates the reversing entry for you in the following accounting period.
Example of a Reversing Journal Entry
To explain the concept, the following entry shows an expense accrual in January for an
$18,000 expense item for which the supplier's invoice has not yet arrived:
Debit
Expense

Credit

18,000

Accrued expenses

18,000

You now create the following reversing entry at the beginning of the February accounting
period. This leaves the original $18,000 expense in the income statement in January, but now
creates a negative $18,000 expense in the income statement in February.
Debit
Accrued expenses

Credit

18,000

Expense

18,000

But we are not done yet. The supplier's invoice arrives later in February, and we record it with
the following entry, which offsets the negative $18,000 that would otherwise have appeared in
the company's income statement in February:
Debit
Expense

Credit

18,000

Accounts payable

18,000

The result is that the $18,000 expense appears in the company's income statement in January,
which is presumably when it was supposed to appear under the accrual basis of accounting,
while there is no net recognition of any expense at all in February. Thus, a reversing entry has
allowed us to properly record an expense during the period when the expense was incurred,
rather than in a later period, when the company obtains the supplier's invoice.
Two further examples of how to use a reversing entry are:

Accrued revenue. You accrue $10,000 of revenue in January, because the company has
earned the revenue but has not yet billed it to the customer. You expect to invoice the
customer in February, so you create a reversing entry in the beginning of February to
reverse the original $10,000 revenue accrual. The final billing, for a total of $12,000, is
completed later in the month. The net result is the recognition of $10,000 in revenue in
January, followed by the recognition of an additional $2,000 of revenue in February.
Accrued expenses. You accrue a $20,000 expense in January for a supplier invoice that
did not arrive in time for the month-end close. You expect the invoice to arrive a few
days after you close the month, so you create a reversing entry in early February for
$20,000. The invoice arrives, and you record it in February. The net result is the
recognition of a $20,000 expense in January, with no net additional expense recognition
in February.

What if you were to forget to make a reversing entry? In the first example, this means that the
accounting records would already show $10,000 of revenue that was recorded in January, and
will then show an additional $12,000 of revenue in February, so that revenue is overstated by
$10,000 through the two-month period. The key indicator of this problem will be an accrued
account receivable of $10,000 that the accounting staff should eventually spot if it is regularly
examining the contents of its asset accounts.
If you were to forget to reverse the expense in the second example, the accounting records
would show a $20,000 expense in January and another $20,000 expense in February, where the
February amount is erroneous. The key indicator of this problem will be an accrued liability of
$20,000 that the accounting staff should locate if it is periodically examining the contents of
the company's liability accounts.
If you expect to keep an accrual for a long period of time before reversing it, then make note of
the accrual in the journal entry records, and review it as part of every month-end closing
process until you can reverse it. This is also a good reason to conduct account reconciliations
for all balance sheet accounts at regular intervals, which will detect unreversed entries.

Accrual Basis
Definition: Accrual basis is a method of recording accounting transactions for revenue when
earned and expenses when incurred. The accrual basis requires the use of allowances for sales
returns, bad debts, and inventory obsolescence, which are in advance of such items actually

occurring. An example of accrual basis accounting is to record revenue as soon as the related
invoice is issued to the customer.
The alternative method for recording accounting transactions is the cash basis.

Accruals Concept
Accrual Definition
An accrual is a journal entry that is used to recognize revenues and expenses that have been
earned or consumed, respectively, and for which the related cash amounts have not yet been
received or paid out. Accruals are needed to ensure that all revenues and expenses are
recognized within the correct reporting period, irrespective of the timing of the related cash
flows. Without accruals, the amount of revenue, expense, and profit or loss in a period will not
necessarily reflect the actual level of economic activity within a business.
Accruals are a key part of the closing process used to create financial statements under the
accrual basis of accounting; without accruals, financial statements are considerably less
accurate.
Under the double-entry bookkeeping system, an accrued expense is offset by a liability, which
appears in a line item in the balance sheet. If accrued revenue is recorded, it is offset by an
asset, such as unbilled service fees, which also appears as a line item in the balance sheet.
It is most efficient to initially record most accruals as reversing entries. By doing so, the
accounting software in which they are entered will automatically cancel them in the following
reporting period. This is a useful feature when you are expecting to issue an invoice to a
customer or receive an invoice from a supplier in the following period. For example, a business
may know that a supplier invoice for $20,000 will arrive a few days after the end of a month,
but the controller wants to close the books as soon as possible. Accordingly, he records a
$20,000 reversing entry to recognize the expense in the current month. In the next month, the
entry reverses, creating a negative $20,000 expense that is offset by the arrival and recordation
of the supplier invoice.
Accrual Examples
Examples of accruals that a business might record are:

Expense accrual for interest. A local lender issues a loan to a business, and sends the
borrower an invoice each month, detailing the amount of interest owed. The borrower
can record the interest expense in advance of invoice receipt by recording accrued
interest.
Expense accrual for wages. An employer pays its employees once a month for the
hours they have worked through the 26th day of the month. The employer can accrue
all additional wages earned from the 27th through the last day of the month, to ensure
that the full amount of the wage expense is recognized.

Expense accrual for supplier goods and services. A supplier delivers goods at the end
of the month, but is remiss in sending the related invoice. The company accrues the
estimated amount of the expense in the current month, in advance of invoice receipt.
Sales accrual. A services business has a number of employees working on a major
project for the federal government, which it will bill when the project has been
completed. In the meantime, the company can accrue revenue for the amount of work
completed to date, even though it has not yet been billed.

Other Accrual Issues

If a business records its transactions under the cash basis of accounting, then it does not use
accruals. Instead, it records transactions only when it either pays out or receives cash. The cash
basis yields financial statements that are noticeably different from those created under the
accrual basis, since timing delays in the flow of cash can alter reported results. For example, a
company could avoid recognizing expenses simply by delaying its payments to suppliers.
Alternatively, a business could pay bills early in order to recognize expenses sooner, thereby
reducing its short-term income tax liability.

What are accrued expenses?

An accrued expense is an expense that has been incurred, but for which there is not yet any
expenditure documentation.
In place of the expenditure documentation, a journal entry is created to record an accrued
expense, as well as an offsetting liability (which is usually classified as a current liability in the
balance sheet). In the absence of a journal entry, the expense would not appear at all in the
entity's financial statements in the period incurred, which would result in reported profits being
too high in that period.
In short, accrued expenses are used to increase the accuracy of the financial statements, so that
expenses are more closely aligned with those revenues with which they are associated.
A prepaid expense is the reverse of an accrued expense, since a liability is being paid before
the underlying service or asset has been consumed. Consequently, a prepaid asset initially
appears on the balance sheet as an asset.
Accrued Expenses in Practice
Examples of expenses that are are commonly accrued include:

Interest on loans, for which no lender invoice has yet been received
Goods received and consumed or sold, for which no supplier invoice has yet been
received
Services received, for which no supplier invoice has yet been received
Taxes incurred, for which no invoice from a government entity has yet been received
Wages incurred, for which payment to employees has not yet been made

An example of an accrued expense is a situation where a company receives office supplies

from a supplier near the end of a month, but has not yet received an invoice from the supplier

by the time the company closes its books for the month. To properly record this expense in the
month of receipt, the accounting staff records an expense in the supplies expense account with
a debit in the amount that it expects to be billed by the supplier, and records a credit to an
accrued expenses liability account. Thus, if the amount of the office supplies were $500, the
journal entry would be a debit of $500 to the office supplies expense account and a credit of
$500 to the accrued expenses liability account.
The journal entry is normally created as an automatically reversing entry, so that the
accounting software automatically creates an offsetting entry as of the beginning of the
following month. Then, when the supplier eventually submits an invoice to the entity, it cancels
out the reversed entry.
To continue with the preceding example, the $500 entry would reverse in the following month,
with a credit to the office supplies expense account and a debit to the accrued expenses liability
account. The company then receives the supplier invoice for $500, and records it normally
through the accounts payable module of the accounting software, resulting in a debit to the
office supplies expense account and a credit to the accounts payable account. The net result in
the following month is therefore no new expense recognition at all, with the liability for
payment shifting to the accounts payable account.
Realistically, the amount of an expense accrual is only an estimate, and so is likely to be
somewhat different from the amount of the supplier invoice that arrives at a later date.
Consequently, there is usually a small additional amount of expense or negative expense
recognition in the following month, once the journal entry reversal and the amount of the
supplier invoice are netted against each other.
From a practicality perspective, immaterial expenses are not accrued, since it requires too
much work to create and document the related journal entry.
Examples of Accrued Expense Journal Entries

Office supplies received and there is no supplier invoice as of month-end: Debit to

office supplies expense, credit to accrued expenses.
Employee hours worked but not paid as of month-end: Debit to wages expense, credit
to accrued expenses.
Benefit liability incurred and there is no supplier invoice as of month-end: Debit to
employee benefits expense, credit to accrued expenses.
Income taxes are accrued based on income earned. Debit to income tax expense,
credit to accrued expenses.

The first three entries should reverse in the following month. Income taxes are typically
retained as accrued expenses until paid.

What is an over accrual?

An over accrual is a situation where the estimate for an accrual journal entry is too high. This
estimate may apply to an accrual of revenue or expense. Thus, an over accrual of revenue will
result in an excessively high profit in the period in which the journal entry is recorded, while

an over accrual of an expense will result in a reduced profit in the period in which the journal
entry is recorded.
An accrual is usually set up as a reversing entry, which means that the exact opposite of the
original entry is recorded in the accounting system at the beginning of the next accounting
period. When an over accrual is recorded in one period, this means that the reversing entry
causing the reverse effect applies in the next accounting period. Thus:

If there is an over accrual of $500 of revenue in January, then revenue will be too low
by $500 in February.
If there is an over accrual of $1,000 of an expense in January, then the expense will be
too low by $1,000 in February.

An over accrual is not good from the perspective of the auditor, since it implies that a
company's accounting staff is not able to properly estimate the amounts of revenues and
expenses for which it is creating accruals.
The presence of over accruals can be combatted by only making an accrual entry when the
amount to be recorded is easily calculated. If the amount is subject to fluctuation, the most
conservative figure should be recorded.
Example of an Over Accrual
ABC International's accounting staff estimates that the amount of its phone bill for the month
of April will be $5,500, which is based on a recent history of approximately that amount per
month over the past few months. The accounting staff accordingly creates the following entry,
which it sets up as an automatically reversing entry:
Debit
Telephone expense

Credit

5,500

Accrued expenses (liability)

5,500

At the beginning of the next month (May), the accounting system generates a reversing entry,
which is:
Debit
Accrued expenses (liability)
Telephone expense

Credit

5,500
5,500

Finally, later in May, the phone company sends ABC the April phone bill in the amount of
$4,250. The invoice is reduced because of a combination of a rate decrease and ABC having
fewer land lines in use. The entry is:

Debit
Telephone expense

Credit

4,250

Accounts payable

4,250

Thus, ABC initially creates an accrual of $5,500 that exceeds the actual amount of the expense
by $1,250. The over accrual creates $1,250 too much expense in April, and $1,250 too little
expense in May.

What is an under accrual?

An under accrual is a situation where your estimate of the amount of an accrual journal entry is
too low. This scenario can arise for an accrual of either revenue or expense. Thus, an under
accrual of an expense will result in more profit in the period in which the entry is recorded,
while an under accrual of revenue will result in less profit in the period in which the entry is
recorded.
An accrual is typically created as a reversing entry in the accounting software, so that the
opposite of the original entry is recorded at the beginning of the following accounting period;
this flushes the effect of the entry from the financial statements over the course of two
reporting periods. This also means that an under accrual in one period leads to the reverse
effect in the next accounting period. Thus:

If there is an under accrual of $2,000 of revenue in April, then revenue will be too high
by $2,000 in May.
If there is an under accrual of $4,000 of an expense in April, then the expense will be
too high by $4,000 in May.

Auditors are always watching for potential under accruals of expenses, on the grounds that this
creates too great a profit in the period being compiled, reviewed, or audited.
Example of an Under Accrual
ABC International's accounting staff estimates that the billing from a key materials supplier
will be $50,000 based on the amount of goods shipped to the company during the past month
(April). The accounting staff uses this estimate to create a cost of goods sold accrual for
$50,000, and sets it up as an automatically reversing entry, as follows:
Debit
Cost of goods sold expense
Accrued expenses (liability)

Credit

50,000
50,000

10

At the beginning of the next month (May), the accounting system generates a reversing entry,
which is:
Debit
Accrued expenses (liability)

Credit

50,000

Cost of goods sold expense

50,000

Later in May, the supplier sends ABC its April invoice for $60,000. The invoice is higher than
expected, because ABC's accounting staff did not account for a large delivery from the
supplier. The entry is:
Debit
Cost of goods sold expense

Credit

60,000

Accounts payable

60,000

Thus, ABC initially creates an accrual of $50,000 that is lower than the actual amount of the
cost of goods sold by $10,000. The under accrual creates $10,000 too much profit in April, and
$10,000 too much expense in May.

Where do accruals appear on the balance sheet?

The vast majority of accruals are for expenses. You record an accrued expense when you have
incurred the expense but have not yet recorded a supplier invoice (probably because you have
not yet received the invoice).
Accrued expenses tend to be extremely short-term, so you would record them within the
current liabilities section of the balance sheet. Here are examples of accrued expenses and the
accounts in which you would record them:

Interest accrual is recorded with a credit to the interest payable account

Payroll tax accrual is recorded with a credit to the payroll taxes payable account
Wage accrual is recorded with a credit to the wages payable account

If you have several small accruals, it may be acceptable to record them all within an "other
liabilities" account. You should not record any accruals in the accounts payable account, since
that is reserved for trade payables that are usually posted to the account through the accounts
payable module in your accounting software.
A less common accrual is for revenue. You record accrued revenue when you have earned
revenues from a customer, but have not yet billed the customer (once you bill the customer, the
sale is recorded through the billing module in your accounting software). Accrued revenue

11

situations may last for several accounting periods, until the appropriate time to invoice the
customer. Nonetheless, accrued revenue is characterized as short-term, and so would be
recorded within the current assets section of the balance sheet. The entry for accrued revenue is
typically a credit to the sales account and a debit to an accrued revenue account. Do not record
any revenue accruals in the accounts receivable account, since that is reserved for trade
receivables that are usually posted to the account through the billings module in your
accounting software.
You should always create accrual journal entries so that they automatically reverse themselves
in the next accounting period. Otherwise, there is a strong likelihood that they will remain on
the balance sheet long after they should have been removed.
Auditors will review any accruals on the balance sheet above a certain minimum size, so be
sure to maintain detailed supporting documentation containing the reasons why you have
recorded
them.

The Trial Balance | Example | Format

The Trial Balance and its Role in the Accounting Process
The trial balance is a report run at the end of an accounting period, listing the ending balance in
each account. The report is primarily used to ensure that the total of all debits equals the total
of all credits, which means that there are no unbalanced journal entries in the accounting
system that would make it impossible to generate accurate financial statements. The year-end
trial balance is typically asked for by auditors when they begin an audit, so that they can
transfer the account balances on the report into their auditing software; they may ask for an
electronic version, which they can more easily copy into their software.
Even when the debit and credit totals stated on the trial balance equal each other, it does not
mean that there are no errors in the accounts listed in the trial balance. For example, a debit
could have been entered in the wrong account, which means that the debit total is correct,
though one underlying account balance is too low and another balance is too high. For
example, an accounts payable clerk records a $100 supplier invoice with a debit to supplies
expense and a $100 credit to the accounts payable liability account. The debit should have been
to the utilities expense account, but the trial balance will still show that the total amount of
debits equals the total number of credits.
The trial balance can also be used to manually compile financial statements, though with the
predominant use of computerized accounting systems that create the statements automatically,
the report is rarely used for this purpose. In effect, there is no longer a need to use the trial
balance report in accounting operations.
When the trial balance is first printed, it is called the unadjusted trial balance. Then, when the
accounting team corrects any errors found and makes adjustments to bring the financial
statements into compliance with an accounting framework (such as GAAP or IFRS), the report
is called the adjusted trial balance. The adjusted trial balance is typically printed and stored in
the year-end book, which is then archived. Finally, after the period has been closed, the report
is called the post-closing trial balance.

12

The trial balance is strictly a report that is compiled from the accounting records. However,
since adjusting entries may be made as a result of reviewing the report, it could be said that
trial balance accounting encompasses the adjustment process that converts an unadjusted trial
balance into an adjusted trial balance.
If there are subsidiaries in an organization that report their results to a parent company, the
parent may request an ending trial balance from each subsidiary, which it uses to prepare
consolidated results for the entire company.
The general ledger is the report preferred by internal accountants, since it also shows the
detailed transactions that comprise the ending balance. This additional level of detail reveals
the activity in an account during an accounting period, which makes it easier to conduct
research and spot possible errors.
Trial Balance Format
The initial trial balance report contains the following columns:
1.
2.
3.
4.

Account number
Account name
Ending debit balance (if any)
Ending credit balance (if any)

Each line item only contains the ending balance in an account. All accounts having an ending
balance are listed in the trial balance; usually, the accounting software automatically blocks all
accounts having a zero balance from appearing in the report.
The adjusted version of a trial balance may combine the debit and credit columns into a single
combined column, and add columns to show adjusting entries and a revised ending balance (as
is the case in the following example).
Example of a Trial Balance
The following trial balance example combines the debit and credit totals into the second
column, so that the summary balance for the total is (and should be) zero. Adjusting entries are
added in the next column, yielding an adjusted trial balance in the far right column.
ABC International Trial Balance August 31, 20XX
Unadjusted
Trial Balance

Adjusting
Entries

Adjusted
Trial Balance

Cash

$60,000

$60,000

Accounts receivable

180,000

Inventory

300,000

300,000

Fixed assets (net)

210,000

210,000

Accounts payable

(90,000)

(90,000)

50,000

230,000

13

Accrued liabilities

(50,000)

$(25,000)

(75,000)

Notes payable

(420,000)

(420,000)

Equity

(350,000)

(350,000)

Revenue

(400,000)

Cost of goods sold

290,000

Salaries

200,000

(50,000)

(450,000)
290,000

25,000

225,000

Payroll taxes

20,000

20,000

Rent

35,000

35,000<

Other expenses

15,000

15,000

Total

$0

$0

$0

What is an unadjusted trial balance (preliminary trial balance)

The unadjusted trial balance is the listing of general ledger account balances at the end of a
reporting period, before any adjusting entries are made to the balances to create financial
statements. The unadjusted trial balance is used as the starting point for analyzing account
balances and making adjusting entries. This report is a standard one that can be issued by many
accounting software packages. It can also be manually compiled.
If a company creates financial statements on a monthly basis, the accountant would print an
unadjusted trial balance at the end of each month to initiate the process of creating financial
statements. Alternatively, if the company only creates financial statements once a quarter, one
would print the unadjusted trial balance on a quarterly basis.
In a computerized accounting system, it may not even be apparent that an unadjusted trial
balance is available; instead, the accountant may simply work from the general ledger report,
and adjust it as necessary to create financial statements.
An unadjusted trial balance is only used in double entry bookkeeping, where all account entries
must balance. If a single entry system is used, it is not possible to create a trial balance where
the sum of all debits equals the sum of all credits.
Example of a Trial Balance
In the following example, the unadjusted trial balance is the first column of numbers, while the
second column of numbers contains an adjusting entry; the final column combines the first two
columns, creating the adjusted trial balance. Debit balances (for assets and expenses) are listed
as positive numbers, and credit balances (for liabilities, equity, and revenue) as negative
numbers; the debits and credits exactly offset each other, so the total always equals zero.

14

In an alternative format, the unadjusted trial balance may have a separate column for all debit
balances and a separate column for all credit balances. This is useful for ensuring that the total
of all debits equals the total of all credits.
ABC Company Trial Balance June 30, 20XX
Unadjusted
Trial Balance

Adjusting
Entries

Adjusted
Trial Balance

Cash

$60,000

$60,000

Accounts receivable

180,000

180,000

Inventory

300,000

300,000

Fixed assets (net)

210,000

210,000

Accounts payable

(90,000)

(90,000)

Accrued liabilities

(50,000)

$(25,000)

(75,000)

Notes payable

(420,000)

(420,000)

Equity

(350,000)

(350,000)

Revenue

(400,000)

(400,000)

Cost of goods sold

290,000

290,000

Salaries

200,000

25,000

225,000

Payroll taxes

20,000

20,000

Rent

35,000

35,000<

Other expenses

15,000

15,000

Total

$0

$0

$0

The adjusting entry in the example is for the accrual of salaries that were unpaid as of the end
of June.

What is an adjusted trial balance?

An adjusted trial balance is an unadjusted trial balance to which adjusting entries have been
added. The intent of adding these entries is to correct errors in the initial version of the trial
balance and to bring the entity's financial statements into compliance with an accounting
framework, such as Generally Accepted Accounting Principles or International Financial
Reporting Standards.
Once all adjustments have been made, the adjusted trial balance is essentially a summarybalance listing of all the accounts in the general ledger - it does not show any detail
transactions that comprise the ending balances in any accounts. The adjusting entries are shown

15

in a separate column, but in aggregate for each account; thus, it may be difficult to discern
which specific journal entries impact each account.
The adjusted trial balance is not part of the financial statements - rather, it is an internal report
that has two purposes:

To verify that the total of the debit balances in all accounts equals the total of all credit
balances in all accounts; and
To be used to construct financial statements (specifically, the income statement and
balance sheet; construction of the statement of cash flows requires additional
information).

The second application of the adjusted trial balance has fallen into disuse, since computerized
accounting systems automatically construct financial statements. However, it is the source
document if you are manually compiling financial statements. In the latter case, the adjusted
trial balance is critically important - financial statements cannot be constructed without it.
Example of an Adjusted Trial Balance
The following report shows an adjusted trial balance, where the initial, unadjusted balance for
all accounts is located in the second column from the left, various adjusting entries are noted in
the third column from the left, and the combined, net balance in each account is stated in the
far right column.
ABC International
Trial Balance
July 31, 20XX
Unadjusted
Trial Balance

Adjusting
Entries

Adjusted
Trial Balance

Cash

$60,000

$60,000

Accounts receivable

180,000

Inventory

300,000

300,000

Fixed assets (net)

210,000

210,000

Accounts payable

(90,000)

(90,000)

Accrued liabilities

(50,000)

50,000

$(25,000)

230,000

(75,000)

Notes payable

(420,000)

(420,000)

Equity

(350,000)

(350,000)

Revenue

(400,000)

Cost of goods sold

290,000

Salaries

200,000

(50,000)

(450,000)
290,000

25,000

225,000

16

Payroll taxes

20,000

20,000

Rent

35,000

35,000<

Other expenses

15,000

15,000

Total

$0

$0

$0

The adjusting entries in the example are for the accrual of $25,000 in salaries that were unpaid
as of the end of July, as well as for $50,000 of earned but unbilled sales.

Trial balance errors

The trial balance is a summary-level of listing of the debit or credit account total in each
account. You normally use the initial, or unadjusted, trial balance for two reasons:

To ensure that the total of all debits equals the total of all credits, thereby ensuring that
all of the underlying transactions are in balance.
To use as the starting point for adjusting entries that will bring the information in the
trial balance into compliance with an accounting framework, such as Generally
Accepted Accounting Principles or International Financial Reporting Standards.

This unadjusted trial balance may contain a number of errors, only a few of which are easy to
spot in the trial balance report format. Here are the more common errors, with suggestions on
how to find them:

Entries made twice. If an entry is made twice, the trial balance will still be in balance,
so that is not a good document for finding it. Instead, for an ongoing transaction, you
may have to wait for the issue to resolve itself. For example, a duplicate invoice to a
customer will be rejected by the customer, while a duplicate invoice from a supplier
will (hopefully) be spotted during the invoice approval process.
Entries not made at all. Impossible to find on the trial balance, since it is not there (!).
Your best bet is to maintain a checklist of standard entries, and verify that all of them
have been made.
Entries to the wrong account. This may be apparent with a quick glance at the trial
balance, since an account that previously had no balance at all now has one. Otherwise,
the best form of correction is preventive - use standard journal entry templates for all
recurring entries.
Reversed entries. An entry for a debit may be mistakenly recorded as a credit, and vice
versa. This issue may be visible on the trial balance, especially if the entry is large
enough to change the sign of an ending balance to the reverse of its usual sign.
Transposed numbers. The digits in a number may have been switched. This is easy to
find, since the underlying entry is unbalanced, and so should not have been accepted by

17

the accounting software. If a manual system is being used, journal entry totals must
compared to the totals in the trial balance. This issue relates to the following one.
Unbalanced entries. This is listed last, since it is impossible in a computerized
environment, where entries must be balanced or the system will not accept them. If you
are using a manual system, then the issue will be apparent in the column totals of the
trial balance. However, locating the exact entry is vastly more difficult, and will call for
a detailed review of every entry, or at least of the totals in every subsidiary journal that
rolls into the general ledger.

Whenever you correct an error, be sure to use a clearly labeled journal entry with supporting
documentation, so that someone else can trace through your work at a later date.

What is a post-closing trial balance?

A post-closing trial balance is a listing of all balance sheet accounts containing non-zero
balances at the end of a reporting period. The post-closing trial balance is used to verify that
the total of all debit balances equals the total of all credit balances, which should net to zero.
This is one of the last steps in the period-end closing process.
The post-closing trial balance contains no revenue, expense, gain, loss, or summary account
balances, since these temporary accounts have already been closed and their balances moved
into the retained earnings account as part of the closing process.
Once you have ensured that the total of all debits and credits the report are the same number,
set a flag to prevent additional transactions from being recorded in the old accounting period,
and begin recording accounting transactions for the next accounting period.
If any revenue, expense, gain, loss, or summary account balances appear in the trial balance
subsequent to the closing process, it is because they are associated with the next accounting
period.
The post-closing trial balance contains columns for the account number, account description,
debit balance, and credit balance. It will likely not contain "Post Closing Trial Balance" in the
header, since few accounting computer systems use this designation. Instead, it will use the
standard "Trial Balance" report header.
Accounting software requires that your journal entries balance before it allows them to be
posted to the general ledger, so it is essentially impossible to have an unbalanced trial balance.
Thus, the post-closing trial balance is only useful if you are manually preparing accounting
information. For this reason, most procedures for closing the books do not include a step for
printing and reviewing the post-closing trial balance.
Example of a Post-Closing Trial Balance
Note that there are no temporary accounts listed in the following post-closing trial balance:
ABC Company Trial Balance June 30, 20XX
Account

Account

18

Number

Description

Debit

Credit

1000

Cash

1500

Accounts receivable

320,000

2000

Inventory

500,000

3000

Fixed assets

2,000,000

3100

Accumulated depreciation

(480,000)

4000

Accounts payable

$195,000

4500

Accrued expenses

108,000

5000

Retained earnings

642,000

5500

Common stock

$105,000

1,500,000
Totals

$2,445,000

$2,445,000

19