Adjusted Trial Balance (Post-Adjustment Trial Balance)
Purpose of an Adjusted Trial Balance
The Adjusted Trial Balance (also known as the Post-Adjustment Trial Balance) is a list of all General Ledger account balances after balance day adjustments have been recorded. Its primary purpose is to:
- Verify the equality of debits and credits after adjustments.
- Ensure the accounting equation (Assets = Liabilities + Owner’s Equity) remains in balance.
- Provide accurate account balances for preparing financial statements (Income Statement and Balance Sheet).
- Act as a check that balance day adjustments have been correctly posted to the General Ledger.
KEY TAKEAWAY: The Adjusted Trial Balance proves the arithmetical accuracy of the General Ledger after balance day adjustments.
Preparation of an Adjusted Trial Balance
The process of preparing an Adjusted Trial Balance involves the following steps:
- Prepare a Pre-Adjustment Trial Balance: This is a list of all General Ledger account balances before any balance day adjustments are made. Its purpose is to verify that total debits equal total credits before adjustments.
- Record Balance Day Adjustments: Identify and record all necessary balance day adjustments (BDAs) in the General Journal. Common adjustments include:
- Prepaid expenses (e.g., prepaid rent, prepaid insurance)
- Accrued expenses (e.g., wages payable, interest payable)
- Depreciation expense
- Bad and doubtful debts
- Unearned revenue
- Accrued revenue
- Post Adjustments to the General Ledger: Transfer the debit and credit entries from the General Journal to the respective accounts in the General Ledger.
- Calculate Adjusted Account Balances: For each account in the General Ledger, determine the adjusted balance by incorporating the effects of the balance day adjustments.
- Prepare the Adjusted Trial Balance: List all General Ledger accounts with their adjusted debit or credit balances in a new trial balance. Ensure that the total debits equal the total credits.
EXAM TIP: Always start with the pre-adjustment trial balance and clearly show all adjustments made in the general journal before preparing the adjusted trial balance.
The Adjusted Trial Balance typically follows a columnar format, including:
- Account Name: The name of each General Ledger account.
- Debit: The debit balance of the account.
- Credit: The credit balance of the account.
Here’s an example of an Adjusted Trial Balance:
KINGSTON HOMEWARES
Adjusted Trial Balance as at 30 June 2025
| Account |
Debit ($) |
Credit ($) |
| Inventory |
33,100 |
|
| Accounts Receivable |
12,000 |
|
| Prepaid Rent Expense |
4,000 |
|
| Fixtures and Fittings |
50,000 |
|
| Accumulated Depreciation |
|
5,000 |
| Bank |
1,000 |
|
| Accounts Payable |
|
19,000 |
| Loan – Wonderbucks |
|
45,000 |
| Capital – Gemeika |
|
29,000 |
| Sales |
|
101,000 |
| Rent Expense |
2,000 |
|
| Depreciation Expense |
5,000 |
|
| Totals |
107,100 |
199,000 |
Because of the balance day adjustments, totals are not equal at this stage. This is because profit/loss have not been transferred to Owner’s Equity.
Importance of Balance Day Adjustments
Balance day adjustments are crucial for:
- Accurate Financial Reporting: Ensuring that the Income Statement reflects revenues earned and expenses incurred during the period (accrual accounting).
- Matching Principle: Matching expenses with the revenues they helped generate in the same accounting period.
- Correct Asset and Liability Valuation: Reflecting the true economic value of assets and liabilities on the Balance Sheet.
- Ethical Considerations: Providing a fair and accurate representation of the business’s financial performance and position.
COMMON MISTAKE: Students often forget to adjust the related asset or liability account when recording balance day adjustments. For example, when recording depreciation expense, both the depreciation expense account and the accumulated depreciation account must be adjusted.
Relationship to Financial Statements
The Adjusted Trial Balance provides the necessary information for preparing the:
- Income Statement: Revenues and expenses are extracted from the Adjusted Trial Balance to calculate net profit or loss.
- Balance Sheet: Assets, liabilities, and owner’s equity are extracted from the Adjusted Trial Balance to present the financial position of the business at a specific point in time.
Example: Hack and Saw
Referring to the Hack and Saw example provided:
Hack and Saw - Pre-adjustment Trial Balance as at 30 June 2025
| Account |
Debit ($) |
Credit ($) |
| Accounts Receivable |
17,000 |
|
| Accumulated Depreciation of Display Equipment |
|
12,100 |
| Administrative Expenses |
10,500 |
|
| Bank |
5,300 |
|
| Capital – Barr |
|
68,000 |
| Cost of Sales |
80,000 |
|
| Display Equipment |
49,000 |
|
| Drawings |
16,000 |
|
| GST Clearing |
400 |
|
| Interest Expense |
5,500 |
|
| Inventory |
38,000 |
|
| Loan – DR Finance |
|
35,000 |
| Prepaid Advertising |
2,800 |
|
| Rent Expense |
26,000 |
|
| Sales |
|
160,000 |
| Wages |
36,000 |
|
| Totals |
286,500 |
286,500 |
- A physical Inventory count on 30 June 2025 showed \$37,100 inventory on hand.
- The display equipment is to be depreciated at 15% p.a.
- A seven-month advertising campaign was paid in advance on 1 February 2025.
- A payment of \$1,500 administrative expenses has been incorrectly posted to Wages.
- Reports are prepared yearly.
General Journal Entries:
-
Inventory Adjustment:
- Debit: Cost of Sales \$900
- Credit: Inventory \$900 (\$38,000 - \$37,100 = \$900)
-
Depreciation Expense:
- Debit: Depreciation Expense \$7,350
- Credit: Accumulated Depreciation of Display Equipment \$7,350 (\$49,000 * 15% = \$7,350)
-
Prepaid Advertising:
- Debit: Advertising Expense \$2,000
- Credit: Prepaid Advertising \$2,000 (\$2,800 * 5/7 = \$2,000 - 5 months expired)
-
Wages Correction:
- Debit: Administrative Expenses \$1,500
- Credit: Wages \$1,500
Hack and Saw - Adjusted Trial Balance as at 30 June 2025 (Illustrative)
| Account |
Debit ($) |
Credit ($) |
| Accounts Receivable |
17,000 |
|
| Accumulated Depreciation of Display Equipment |
|
19,450 |
| Administrative Expenses |
12,000 |
|
| Bank |
5,300 |
|
| Capital – Barr |
|
68,000 |
| Cost of Sales |
80,900 |
|
| Display Equipment |
49,000 |
|
| Drawings |
16,000 |
|
| GST Clearing |
400 |
|
| Interest Expense |
5,500 |
|
| Inventory |
37,100 |
|
| Loan – DR Finance |
|
35,000 |
| Advertising Expense |
2,000 |
|
| Rent Expense |
26,000 |
|
| Sales |
|
160,000 |
| Wages |
34,500 |
|
| Depreciation Expense |
7,350 |
|
| Totals |
292,050 |
309,450 |
Note: Totals are not equal at this stage because the profit/loss figure hasn’t been transferred. A final step will be to transfer the profit/loss to Owner’s Equity to balance the Adjusted Trial Balance.
STUDY HINT: Practice preparing adjusted trial balances with different types of balance day adjustments. Focus on understanding the impact of each adjustment on the relevant accounts.
Ethical Considerations
Deliberately excluding or misrepresenting balance day adjustments can lead to:
- Inaccurate financial statements: Misleading stakeholders (investors, creditors, management) about the business’s financial performance and position.
- Unethical behavior: Violating accounting principles and potentially engaging in fraudulent activities.
- Legal consequences: Facing penalties from regulatory bodies for non-compliance with accounting standards.
VCAA FOCUS: VCAA often assesses students’ understanding of the ethical implications of manipulating financial data through balance day adjustments. Be prepared to discuss the importance of transparency, accuracy, and objectivity in financial reporting.
