Whether you’re building a career as an accountant or you run a business or department, it’s important to have a good understanding of the adjusted trial balance. Let’s take a look at its purpose, and what it consists of.
What is the adjusted trial balance?
The extended trial balance is a working paper that’s used as a basis for preparing the profit and loss account and the statement of financial position at the end of the financial period.
As a working paper it does exactly what the name suggests; we use it to bring together the balances from the ledgers in the form of a trial balance, then add columns that we can use to make any adjustments and/or corrections. We add adjustment columns, profit and loss account columns, and statement of financial position columns (a debit and credit column for each heading).
Using the adjustment columns
The adjustment columns on an extended trial balance are for entering journals that have been completed after the year end balancing has taken place. These adjustments will include the routine end-of-year adjustments for depreciation charge and accruals and prepayments, for example.
The adjustments will also include corrections that may be necessary in the light of new information or because errors were revealed by the trial balance (i.e. it did not balance). By using the adjustment columns, we save ourselves a lot of time by not reopening the accounts that we have closed down when preparing the original trial balance.
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Profit and loss and statement of financial position
Once the necessary adjustments have been made in the extension of the trial balance, all income and expenditure figures can be entered into the profit and loss account columns to determine profit / loss for the period. This leaves the asset, liability and capital account balances for the statement of financial position columns.
The profit and loss account columns will have to be added up to determine whether a profit or a loss was made. This will then be entered on the statement of financial position as an asset or liability accordingly, which should be the final figure to make all the columns balance.
A profit is when the credit side of the income statement is larger than the debit side (we have had more income than expenses) and a loss is when the debit side of the income statement is larger than the credit side (we have had more expenses than income).