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Every organization needs to prepare a set of financial statements at the end of every accounting period to assess its performance and to convey it to other stakeholders.¹
This article will cover the following topics:
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Unadjusted trial balance is an important step towards preparing a complete set of financial statements. It summarizes all the ledger accounts balances in one statement. ¹ You will get an overview of all the accounts that are used in your business for example, sales account, purchase account, inventory account etc. in a summary form with the help of an unadjusted trial balance.
Unadjusted trial balance is used to identify the necessary adjusting entries to be made at the end of the year.² Adjusting entries are made mainly due to the usage of accrual system of accounting. ² In accrual accounting, revenue and expenses are recorded when they are earned or incurred irrespective of whether the cash is exchanged or not. There are mainly five types of adjusting entries that are passed while preparing an adjusted trial balance which relates to accrued revenues and expenses, deferred revenues and expenses and depreciation expense.³ After when these adjusting entries are passed, the trial balance is called adjusted trial balance.
Preparation of unadjusted trial balance is the fourth step in the accounting cycle after identification of a transaction, recording it in journal and posting it in to ledger. It lists all the ledger accounts in a summary form which will later be used in the financial statements. Step by step procedure for preparing an unadjusted trial balance is as follows.
An unadjusted trial balance is prepared using either a sheet of paper or a spreadsheet program. Preparation of trial balance starts with a heading.
A heading is written at the top of the sheet consisting of three lines mentioning the company’s name, name of the trial balance and date of the reporting period.⁴ (example below)
ABC Company | |
---|---|
Unadjusted Trial Balance | |
For the year ended December 31, 2019 |
Three columns are used while preparing an unadjusted trial balance. One column is used to show the account names, second column is used to show all the debit balances, and third column shows credit balances.
All the ledger accounts with debit balances are shown in the left column and those with credit balances are shown on the right.
Accounts are generally shown in order of their account number. Every organization has a chart of accounts in which a unique number is given to each business account. Majority of the organizations number their chart of accounts starting from the balance sheet items, so the unadjusted trial balance also shows the account numbers in that order starting with the assets, liabilities, and equity accounts and ending with income and expense accounts (see example below).
Account | Debits | Credits |
---|---|---|
Assets | Balances included on debit side | |
Liabilities | Balances Included on credit side | |
Equity | Balances included on credit side | |
Income | Balances included on credit side | |
Expense | Balances included on debit side | |
TOTAL | Debit & Credit side must be equal |
After finalizing the format of an unadjusted trial balance, the first items to include in the format are assets such as property, plant and equipment, cash, inventory and receivables etc.
It is worth mentioning here that assets have debit balances so the amounts related to assets will be included in the second column of the trial balance related to debit balances.
After including all the assets, then liabilities and stockholders’ equity accounts are included in the trial balance.
Liabilities and equity have credit balances and so their balances are included in the third column related to credit balances.
Next accounts to include in the trial balance relates to income statement.
Revenue items are included first. Revenue can either be generated from sale of goods or provision of services. Revenue items have credit balances and are included in the third column related to credit balances.
Expense accounts are the last items to be included in a trial balance. They have debit balances and are thus included in the second column.
Final step is to add both the debit and credit columns of the trial balance. Total of both the columns must be equal to each other. If there is any discrepancy, it means that either you may not have picked up correct balances from Ledger or there is any mistake in recording the transaction in Journal.
Accountants of ABC Company have passed the journal entries in the journal and posts the entries in to their respective ledgers. He then took all the balances of each account in the Ledger and summarized them in an unadjusted trial balance which is as follows.
ABC Company | |
---|---|
Unadjusted Trial Balance | |
For the year ended December 31, 2019 |
Account | Debits | Credits |
---|---|---|
Property, plant and equipment | 152,000 | |
Furniture and fixtures | 114,000 | |
Inventory | 6,400 | |
Accounts Receivables | 12,200 | |
Cash | 24,400 | |
Long term loan | 74,000 | |
Accounts Payable | 6,400 | |
Share Capital | 100,000 | |
Retained earnings | 88,000 | |
Sales Revenue | 114,600 | |
Salaries Expense | 52,000 | |
Marketing expenses | 14,000 | |
Interest expense | 8,000 | |
Total | 383,000 | 383,000 |
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This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
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