Adjusted Trial Balance

The adjusted trial balance is the list of every account's balance after the month-end adjusting entries, and it is the list the financial statements are built from. This guide shows how to get from the unadjusted trial balance to the adjusted one, works a full example with six adjustments, and walks through the mistakes the exercises are built to catch.

Where the adjusted trial balance fits

A bookkeeping month runs in a fixed order. Everyday transactions are journalized and posted to the ledger. At month end you prepare a trial balance from the ledger, which proves that total debits equal total credits. That first trial balance is called the unadjusted trial balance, because it only holds what came through as transactions.

Some things that belong to the month never arrive as a transaction. Equipment wears out a little every day, but nobody sends an invoice for it. Employees work the last few days of the month and are paid next month. Supplies are used up a few at a time. An insurance policy paid in advance expires month by month. The adjusting entries record these amounts.

Once the adjusting entries are posted, you prepare a second trial balance: the adjusted trial balance. It is the source for the income statement, the statement of owner's equity and the balance sheet. After the statements, the closing entries clear the temporary accounts and a post-closing trial balance confirms that the books are ready for next month.

How each adjustment changes the balances

Every adjusting entry has two sides: one account on the income statement (a revenue or an expense) and one on the balance sheet (an asset, a contra asset or a liability). Cash is never part of an adjusting entry. That gives a simple way to think about the adjusted trial balance: take each unadjusted balance, then move two accounts for each adjustment.

• Supplies used: Supplies Expense goes up and Supplies goes down by the amount used. You are usually told what is still on hand, so the amount used is the Supplies balance minus the count.
• Insurance expired: Insurance Expense goes up and Prepaid Insurance goes down by the expired amount.
• Depreciation: Depreciation Expense goes up and Accumulated Depreciation goes up. Equipment itself stays at cost; the contra asset carries the depreciation (see depreciation journal entry).
• Accrued wages: Wages Expense goes up and Wages Payable goes up for wages earned but not yet paid (see accrued expenses).
• Unearned revenue earned: Unearned Revenue goes down and Service Revenue goes up for the work done that customers paid for in advance (see unearned revenue).
• Accrued interest: Interest Expense goes up and Interest Payable goes up for interest that has built up on a note but hasn't been paid. One month's interest is principal × annual rate ÷ 12.

Because each adjustment adds the same amount to a debit and a credit, the adjusted trial balance still balances. Its totals are usually bigger than the unadjusted totals, though, because some adjustments raise a debit balance and a credit balance at the same time.

Step by step

1. Write down the unadjusted balances. Every account on the unadjusted trial balance comes across, even if no adjustment touches it. Cash, Equipment, Accounts Payable, Owner's Capital and Owner's Drawing usually come across unchanged.
2. List the two accounts each adjustment changes, and the direction for each. Work through them one at a time rather than all at once.
3. Add accounts that weren't there before. Adjustments often create accounts with no unadjusted balance: Supplies Expense, Insurance Expense, Depreciation Expense, Wages Payable, Interest Payable and Interest Expense are the usual ones.
4. Work out each adjusted balance and keep it on the account's normal side: debits for assets, expenses and drawing; credits for liabilities, capital, revenue and contra assets like Accumulated Depreciation. If you are unsure, normal balance of accounts has the full table.
5. Total both columns. If they don't agree, an adjustment has probably moved only one of its two accounts.

Worked example: Juniper Landscaping, September

Juniper Landscaping's unadjusted trial balance at September 30 shows the following balances.

The month-end facts are:

1. A count shows $440 of supplies still on hand.
2. $240 of prepaid insurance expired during the month.
3. Depreciation on equipment for the month is $300.
4. Employees earned $840 of wages in the last days of the month, to be paid next month.
5. $820 of the work customers paid for in advance was done this month.
6. One month's interest on the $16,000 note payable at 6% a year has built up and is unpaid.

Take them one at a time:

• (a) Supplies used = $1,640 − $440 = $1,200. Supplies Expense becomes $1,200; Supplies falls to $440.
• (b) Insurance Expense becomes $240; Prepaid Insurance falls from $2,160 to $1,920.
• (c) Depreciation Expense becomes $300; Accumulated Depreciation rises from $7,200 to $7,500.
• (d) Wages Expense rises from $2,000 to $2,840; Wages Payable becomes $840.
• (e) Unearned Revenue falls from $4,300 to $3,480; Service Revenue rises from $10,130 to $10,950.
• (f) $16,000 × 6% ÷ 12 = $80. Interest Expense and Interest Payable each become $80.

The adjusted trial balance:

The totals rose by $1,220 from the unadjusted $68,230. That is exactly the three adjustments that raised a credit balance without lowering another credit: depreciation ($300), accrued wages ($840) and accrued interest ($80). The other three adjustments moved an amount from one account to another on the same side, so they left the totals unchanged. Checking the change in totals this way is a quick test of your work.

Common mistakes

Copying the unadjusted balances

It sounds obvious, but under time pressure it happens: the trial balance is rewritten with the old figures and labelled "adjusted". Juniper's net income would then be overstated, because $2,660 of expenses (supplies, insurance, depreciation, accrued wages and interest) and $820 of revenue would be missing. Every adjustment must show up in two accounts.

Recording the supplies on hand as the expense

The count tells you what is left. The expense is what was used. Entering $440 as Supplies Expense and leaving $1,200 in Supplies swaps the two. Notice that the totals still agree, so the trial balance won't warn you. Ask instead: does the Supplies balance now equal the count? It should.

Leaving off the new accounts

If you only adjust the accounts already listed, Wages Payable, Interest Payable and the new expense accounts never appear. Juniper's debits would come to $67,630 and its credits to $68,530, which don't agree. Before you total, scan the adjustments for any account that isn't on your list yet.

Moving only one side of each adjustment

Another common slip is to raise the expenses and revenue but forget the balance sheet side: Supplies, Prepaid Insurance, Accumulated Depreciation and Unearned Revenue stay where they were, and the payables never appear. Juniper's debits would come to $70,890 against credits of $69,050. Unequal totals almost always point to a one-sided adjustment.

Treating an owner investment as an adjustment

An investment by the owner during the month is an everyday transaction, already posted to Cash and Owner's Capital before the unadjusted trial balance was prepared. It doesn't change at month end. The same goes for drawings: Owner's Drawing comes across unchanged.

How the exercises check your work

Each exercise shows an unadjusted trial balance and the month's adjustment facts, with new numbers every time. You list each account under Debit balances or Credit balances with its adjusted amount, then enter both totals. The answer is checked by code against the balances computed from the same facts, so each line and each total is marked right or wrong. If your answer matches one of the mistakes above, the feedback names it.

The free exercise has three adjustments; the later ones add accruals, earned unearned revenue, interest on a note and an owner investment that is already in capital. When you can do these, the next steps are the income statement and the closing entries, both prepared from the adjusted trial balance.