An adjusted trial balance corrects errors and reallocates values in general ledger accounts used to track business activities. It is reviewed at the end of the fiscal year to ensure accuracy and completeness, and adjustments are made for clarity and consistency in financial reporting according to generally accepted accounting procedures. The final version is used to create financial statements.
An adjusted trial balance includes a series of transactions that are used to correct errors and reallocate values. A trial balance is a complete list of all general ledger accounts used to track trading activity and their values. The trial balance is used to create the income statement, balance sheet, and cash flow documents. All of these reports form the financial statements that are issued to investors, finance companies, and business owners.
When a business is started, general ledger accounts are created to account for the different activities that are required to run a business. Actual account names may vary, but the primary purpose of accounts is standard. Every business needs to keep track of cash, accounts payable and receivable, payroll, loans, and the amount invested in the business.
At the end of the fiscal year, the trial balance is reviewed to ensure that the values in each account are accurate and complete. During this process, errors and omissions can be identified. The accountant creates and manages a list or journal of errors as part of the review process. The impact of these changes can be seen in the adjusted trial balance.
Some necessary adjustments to trial balance accounts are not focused on bug fixes, but on clarifications. For example, a single investment account can be used to track all investment activity. If there were a mix of long and short term investments during the year, it would be best to create separate general ledger accounts and adjust the values to reflect this separation. This change will increase clarity and can be used to track long-term performance.
There are internationally accepted standards that govern decisions about what is included in the trial balance, approved adjustments, and procedures for common scenarios. These generally accepted accounting procedures (GAAP) are quite detailed and provide instructions to ensure consistency in financial reporting. The notes to the financial statements must list any deviations from GAAP.
Before the accounting records are closed for the year, the list of correction entries is posted to the accounting system. These adjusting entries have a direct impact on the financial statements and are generally kept in a separate document or folder. Each entry includes a reference to supporting documentation or an explanation for the adjustment. In some circumstances, adjustments cannot be posted to the financial system, but are made directly to the trial balance.
The final version, after all the adjustments have been made, is known as the adjusted trial balance. The reconciliation between the original and adjusted versions must include all transactions listed in the adjustment journal. Financial statements can be issued using the values and accounts listed in the adjusted trial balance.
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