Woman with a calculator by Mikhail Nilov
Before you can proceed with the preparation of your financial statements, you will need to prepare the trial balances.
Three trial balances will need to be prepared: unadjusted, adjusted, and post-closing. In this article, we will focus on how to prepare an unadjusted trial balance.
Table of Contents
What is a Trial Balance in Accounting?
A trial balance is a compilation of the balances of a company’s general ledger (GL) in the form of a bookkeeping worksheet. The trial balance is typically prepared at the end of each reporting period.
The goal of producing a trial balance is to make sure that the entries in the organization’s bookkeeping system are mathematically correct. That is, it identifies the balance of credit and debit entries from transactions recorded in the GL.
The accounts that are reflected on a trial balance relate to all vital accounting items, including revenues, equity, expenses, liabilities, assets, losses and gains.
After the adjusting entries are posted, the trial balance is prepared again to make sure the total credits and debits are still balanced. Note that it is not an official financial statement.
Generally, it is meant for internal use and is not distributed to people outside the organization.
What is an Unadjusted Trial Balance?
An unadjusted trial balance lists a company’s balances and accounts before the end-of-period (month, quarter, year, etc.) adjustments are done. It helps you detect errors and analyze company accounts.
One can prepare an unadjusted trial balance by using data from the GL. Because this trial balance is prepared before the adjusting entries, it is not a suitable reference to prepare financial statements. Instead, you can consider it an organized listing of the GL accounts.
On the other hand, an adjusted trial balance is an internal document that includes GL account balances and titles after the adjustments have been made. While it is not a financial statement, the balances of the adjusted account will be displayed on the financial statements.
Both the adjusted and the unadjusted trial balance needs to have the total amount of credit balances equal to the total amount of debit balances.
Note that a trial balance will not balance if both the sides are not equal. In this case, the reason needs to be investigated and corrected.
What is Unadjusted Trial Balance Used For?
Evaluating internal controls of the accounting system of the business.
A base for preparing financial statements after adjustments have been made.
Supporting the audit team in preparing an audit program that is based on the accountants’ capacity.
A base for catching errors and adding adjusting entries.
Preparing an Unadjusted Trial Balance
On a spreadsheet program or sheet of paper, make a table with three columns and list the period’s end date above it. Label the first, second and third columns “Accounts”, “Debit” and “Credit” respectively.
“Accounts” should include every account name in the GL
“Debit” should display the balance of accounts with debit balances
“Credit” should display balances of accounts with credit balances
Depending on the type of account, it will have either a credit or a debit balance. By using separate columns, you can ensure that the total of all credits equals the total of all debits.
List Balance Sheet Accounts
Your balance sheet is made up of equity accounts, assets and liabilities.
In the table, the first accounts to include are assets, such as inventory and cash. These have debit balances.
After this, you include liabilities (eg. accounts payable) and stockholders’ equity accounts (eg. common stock). Equity and liabilities will have credit balances.
As an example, let’s assume your GL is showing a cash balance of $30,000. In this instance, you would list “cash” in the account column and $30,000 in the debit column. Beneath this, you would include your other liability, asset and equity accounts.
List Income Statement Accounts
Your income statement is made up of revenues and expenses.
You will need to list your revenue accounts. These have credit balances and may include service revenue and sales revenue.
Expenses will be the final accounts to include, such as advertising and utilities. These accounts hold debit balances.
For example, let’s assume your company generated $200,000 in sales revenue. In the account column, list “Sales revenue”, and in the credit column, list $200,000. This will be followed by your other expense and revenue accounts.
Check if Trial Balance is Correct
The trial balance is mathematically correct if the total of both sides are identical.
To complete an unadjusted trial balance, put the balances in the debit column. Separately, put those in the credit column. In the appropriate column, put every respective total on the last line. The total credit balance should equal the total debit balance.
If they are not equal, check whether you copied the right balances from the GL. If the balances are correct, it is likely that you recorded a transaction incorrectly in your GL, or that a transaction was omitted from the GL or journal.
Unadjusted trial balances only serve to review accounts and determine required adjustments. Do not use them to prepare financial statements.
Adjustments required may include, for instance, depreciation charges on fixed assets and accrued interest expenses.
Once you make the adjustments to your GL, you create an adjusted trial balance. From there, you prepare a post-closing trial balance, with the entries netting to zero.
We hope this article has given you an insight into getting started with an unadjusted trial balance in accounting.
If you don’t want to burden your own accounts team with the task of reconciliation, NextGen Accounting is just a click away.
We offer credit card reconciliation services and bank reconciliation services, and do a custom setup for every client free of charge. Furthermore, our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC.
NextGen Accounting was founded with your challenges specifically in mind and is dedicated to providing a seamless experience. Contact us today for reconciliation services!