In the accounting cycle, after recording journal entries and posting them in relevant ledger accounts, third step is the preparation of unadjusted trial balance. After that, adjusting entries are posted and then adjusted trial balance is prepared. But what is the difference between unadjusted and adjusted trial balance. Let’s briefly explain both these types of trial balances and then we’ll share an example for better understanding.
Unadjusted trial balance
It is a trial balance which is prepared or extracted from the accounting system prior to posting any adjusting entries. Purpose of this preliminary trial balance is to go through all the account balance and evaluate whether any adjustments are required in the books of account. At this stage, any errors in recording and posting journal entries in relevant ledger accounts are highlighted and rectified.
Adjusted trial balance
It is a trial balance which is prepared or extracted from the accounting system after the adjusting entries have been posted in relevant ledger accounts. Adjusting entries are posted to comply with the accrual method of accounting and to rectify any errors highlighted while reviewing unadjusted trial balance. Adjusted trial balance is then used for preparation of financial statements, which is the next step of accounting cycle.
Let’s use the example from chapter adjusting entries and prepare unadjusted and adjusted trial balances.
Example
Following is the unadjusted trial balance based on which preliminary balance sheet and income statement of Ricardo Garments Inc. was prepared.
Ricardo Garments Inc.
Unadjusted trial balance
For the year ended 31 December 20xx
Based on the review and analysis of unadjusted trial balance, following adjusting entries are posted.
Adjusting entries
| Date | Accounts | Debit | Credit |
| 31 Dec | Depreciation | 18,000 | |
| Accumulated depreciation | 18,000 | ||
| (Recording depreciation of fixed assets) | |||
| 31 Dec | Provision for doubtful debts expense | 500 | |
| Provision for doubtful debts | 500 | ||
| (Recording provision for doubtful debts, a contra asset account which will reduce the balance of receivables) | |||
| 31 Dec | Utility expenses | 2,500 | |
| Accrued liabilities | 2,500 | ||
| (Recording accrued utility expenses) | |||
| 31 Dec | Staff cost | 4,000 | |
| Accrued liabilities | 4,000 | ||
| (Recording accrued wages) | |||
| 31 Dec | Accounts receivable | 12,500 | |
| Services income | 12,500 | ||
| (Recording accrued income related to embroidery services rendered) | |||
| 31 Dec | Insurance expense | 750 | |
| Prepaid insurance | 750 | ||
| (Recording insurance expense based on the proportion of insurance term that has been passed) | |||
| 31 Dec | Deferred income | 2,000 | |
| Training fee income | 2,000 | ||
| (Recording training fee income based on the proportion of completion of the course) |
After incorporating the adjusting entries, following adjusted trial balance is prepared. Accounts whose balance is changed due to adjusting entries are highlighted in red text for better understanding.
Ricardo Garments Inc.
Adjusted trial balance
For the year ended 31 December 20xx
