Difference Between Trial Balance and Adjusted Trial Balance

Key Difference – Trial Balance vs Adjusted Trial Balance
 

The trial balance and the adjusted trial balance are two documents that provide a snapshot of all the ending balances of ledger accounts. Trial balance and adjusted trial balance are prepared for a single point of time (eg: As at 31^st December 2016). The key difference between trial balance and adjusted trial balance is that adjusted trial balance is prepared after adjusting for accruals of revenues, accruals of expenses, prepayments and depreciation.

What is Trial balance

A trial balance is a summarized worksheet which includes all ledger balances as at a particular point in time. All the debit balances will be recorded in one column with all the credit balances in another. The main objective of preparing a trial balance is to detect the mathematical accuracy of the ledger balances.

A trial balance provides all the ending balances in a single document at a glance; therefore, it is easy to use as a reference tool. It also assists in disclosing a number of possible errors in case of occurrence and helps to identify which journal entries should be posted in order to correct the identified errors.

Errors affecting discrepancies in trial balance are,

• Errors of partial omission- only the debit entry or the credit entry is posted in accounts
• Errors of casting – the total of an account is more or less recorded
• Errors of carrying forward- the ending balance is carried forward incorrectly

However, some errors will not be reflected in the trial balance; therefore, even if the trial balances tallies, it cannot be guaranteed that the financial accounts are completely accurate. The following errors will not be reflected in the trial balance.

• Errors of principal in accounting – the entries are posted to the incorrect type of account
• Errors of omission in accounting – the entries are completely omitted from the accounts
• Errors of commission – an entry is posted in the correct type of account, but the wrong account
• Compensating errors – incorrect entries in two or more accounts cancel out each other
• Errors of original entry – incorrect amount is posted to the correct accounts
• Complete reversal of entries – correct amount is posted to the correct accounts but the debits and credits have been reversed

If a discrepancy is found in the trial balance, the difference causing it should be investigated. Until such time the errors are rectified, the amount is put to the suspense account. If the debit side of the trial balance exceeds the credit side then the difference is credited to the suspense account and if the credit balance is greater than the debit balance the difference is debited to the suspense account. Once the errors are identified, rectified and the trial balance tallied, the suspense account is closed since the balance no longer exists. However, in case of a further existence of a balance due to non-location of an error, the respective balance will be shown as an asset (debit balance) or a liability (credit balance).

What is Adjusted Trial Balance?

Adjusted trial balance can be defined as “a listing of the general ledger accounts and their account balances at a point in time after the adjusting entries have been posted”.  Thus, it should always be prepared after the trial balance. Adjusted trial balance includes the following accounting entries, which are not included in the trial balance.

Entries in an Adjusted Trial Balance

Accrual of revenues that were earned but were not yet recorded

This arises from a sale of an asset where the sale is completed but the customer has not yet been billed for the same.

Accrued revenue A/C                        Dr

Revenue A/C                                            Cr

e.g.: Accounts receivable, accrued interest

Accrual of expenses that were incurred but were not yet recorded

This is an expense recorded in accounts before the payment is made.

Expense A/C                                         Dr

Expense payable                                       Cr

e.g.: Interest payable, salaries and wages payable

Prepayments

Prepayment is the settling of a payment prior to its due date.

Prepaid expense A/C                          Dr

Cash A/C                                                     Cr

e.g.: Prepaid rent

Depreciation

Depreciation is a non-cash expense which is recognized in order to account for the deterioration of fixed assets to reflect the reduction in useful economic life. A periodic charge will be incurred and this charge will be dependent on the method used to calculate depreciation. Straight-line method and Reducing balance method are the most commonly used in calculating depreciation.

The objective of creating an adjusted trial balance is to inspect the mathematical accuracy after the adjusting entries are posted in the company accounts. After the adjusted trial balance is prepared the financial balances are used to create the financial statements.

 What is the difference between Trial Balance and Adjusted Trial Balance?

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Image Courtesy:

“DWBA Trial Bal” By John M PASSMORE – Accounting for a Better Life isbn 978-1-905886-66-1 (GFDL) via Commons Wikimedia