An unadjusted trial balance is a summary of the general ledger accounts before making any adjustments while the finished product is the adjusted trial balance.
Both these types of trial balances come from the same bookkeeping records. However, an adjusted trial balance requires corrections and adjustments for missing entries.
Let us discuss what are unadjusted and adjusted trial balances, what are their purposes, and how are these trial balances prepared.
What is an Unadjusted Trial Balance?
The unadjusted trial balance is the collection of ledger account balances at the end of an accounting period before making any changes for corrections and omissions.
The unadjusted trial balance serves as the starting point for creating the adjusted trial balance and then the financial statements.
The unadjusted trial balance report is prepared at the end of an accounting period. It can be prepared manually or using accounting software.
Although it was a common practice to prepare unadjusted trial balances with manual bookkeeping systems, they can still be produced with accounting software.
Also, it’s not necessary that a bookkeeping system always produces unadjusted trial balances from journal accounts. If a small business operates with limited bookkeeping resources and fewer accounts, an unadjusted trial balance can be the same as the adjusted trial balance.
How Unadjusted Trial Balance is Prepared?
A bookkeeping system first prepares transaction records on a daybook or the book of entries.
These transactions are then moved to the journal accounts separately. Then, a general journal is prepared for the summary of all accounts.
An unadjusted trial balance is then a collection of these final figures for all journal accounts from the general journal.
The final task in preparing an adjusted trial balance is to balance the debit and credit sides of all accounts. Any errors or omissions can be adjusted at this stage.
An unadjusted trial balance should show the same amounts for the credit and debit sides. If both sides don’t match, adjustments should be made to rectify errors.
The unadjusted trial balance is only prepared with a double-entry bookkeeping system. If a business operates a single-entry bookkeeping system, it doesn’t create trial balances.
What is the Purpose of Preparing an Unadjusted Trial Balance?
A bookkeeping system does not produce the unadjusted trial balance on purpose. However, it’s an important step in preparing the financial statements of a business.
Think of an unadjusted trial balance as an unfinished product in the process of making another product.
A bookkeeping system must keep records of all financial transactions of a business to ensure financial integrity and progress.
A book of entries will keep accounting entries in the raw format with details about these transactions, dates, amounts, supplier names, etc.
However, this format does not show transactions specifically under each account type. Therefore, the bookkeeping system must process the raw data to produce useful financial information.
An unadjusted trial balance serves the purpose of creating ending balances in each account a business operates including cash, receivables, payables, inventory, and so on.
Then, this unfinished record of journal books becomes the foundation of creating an adjusted trial balance and finally the financial statements of the business.
Example
A company Blue Star Services has the following account balances from its general ledger for its assets, liabilities, expenses, and revenue accounts.
Let’s prepare the unadjusted trial balance for Blue Star Services.
| Account | Debit | Credit |
| Cash | $65,000 | |
| Accounts Receivable | $150,000 | |
| Inventory | $285,000 | |
| Fixed Assets | $1,000,000 | |
| Accounts Payable | $110,000 | |
| Accrued Liabilities | $70,000 | |
| Bank Loans, Long-Term Liabilities | $356,000 | |
| Equity Share | $900,000 | |
| Revenue | $590,000 | |
| Cost of Goods Sold (COGS) | $230,000 | |
| Payroll Expenses | $175,000 | |
| Taxes | $35,000 | |
| Interest on Loans | $18,000 | |
| Other Expenses | $68,000 | |
| Total | $2,026,000 | $2,026,000 |
The next step is to make the adjusting entries and prepare the adjusted trial balance.
What is an Adjusted Trial Balance?
As the name suggests, an adjusted trial balance is the collection of ending balances for ledger accounts after making adjustments.
It is a processed form of the unadjusted trial balance which only states the ending balances without any adjustments.
The adjustments do not have to be mathematical only but they can arise from omissions such as deferred liabilities, deferred revenue, accrued expenses, depreciation, and so on.
The adjusted trial balances are also used only with the double-entry bookkeeping systems and businesses using the single-entry bookkeeping systems do not create adjusted trial balances.
Again, the adjusted trial balances are hard to identify in accounting software or digital systems as they are commonly used in manual bookkeeping systems.
How Adjusted Trial Balance is Prepared?
The first step in creating the adjusted trial balance is to record all transactions in a daybook or the book of general entries.
Digital bookkeeping systems also create a detailed log of all bookkeeping transactions. The purpose of this step is to ensure every financial transaction is recorded correctly.
The next step is to create the unadjusted trial balance by summarizing the credit and debit balances of all journal accounts.
The next step is to make adjustments to the unadjusted trial balance worksheet. These adjustments can be for accruals, deferrals, depreciation, bad debts, and any other accounting entry that couldn’t be recorded earlier.
Once the adjusted trial balance is ready, the accountant can process it to create closing entries. This step ensures all debit and credit sides are equal and every transaction is properly recorded.
This final step resets all journal account balances to zero at the end of the accounting period and all balances are carried forward to the permanent accounts.
These closing entries from permanent accounts are then used to create financial statements for the business.
What is the Purpose of Preparing an Adjusted Trial Balance?
The prime purpose of creating an adjusted trial balance is to record every financial transaction of a business.
A trial balance ensures that all bookkeeping entries are recorded accurately and that no account or entry is omitted from these records.
Then, these records are processed further to create summarized entries for all types of accounts including assets, liabilities, equity, revenue, and expenses.
These summarized entries are then used to create the balance sheet, income statement, and statement of changes in equity.
Adjusted trial balances are useful for the management and auditors. They can use adjusting entries to track changes in financial records.
Adjusted trial balances are also useful for reconciliation and auditing purposes where auditors can track any mistakes or errors.
Example
Let us continue from our example above for Blue Star Services.
Let’s assume that the company received $8,000 on the final day of the month from a customer. The company accountant also noted that the unadjusted trial balance skipped an entry of $3,000 for prepaid utilities.
The trial balance also needed a depreciation cost entry of $7,000 for fixed assets.
Here is how these adjusting entries will be adjusted.
| Account | Debit | Credit |
| Cash | $8,000 | |
| Accounts Receivable | $8,000 | |
| Accrued Liabilities | $3,000 | |
| Other Expenses (Utilities) | $3,000 | |
| Depreciation Expense | $7,000 | |
| Accumulated Depreciation | $7,000 |
The adjusted trial balance after these entries will show as:
| Account | Debit | Credit |
| Cash | $73,000 | |
| Accounts Receivable | $142,000 | |
| Inventory | $285,000 | |
| Fixed Assets | $1,000,000 | |
| Depreciation Expense | $7,000 | |
| Accumulated Depreciation | $7,000 | |
| Accounts Payable | $110,000 | |
| Accrued Liabilities | $67,000 | |
| Bank Loans, Long-Term Liabilities | $356,000 | |
| Equity Share | $900,000 | |
| Revenue | $590,000 | |
| Cost of Goods Sold (COGS) | $230,000 | |
| Payroll Expenses | $175,000 | |
| Taxes | $35,000 | |
| Interest on Loans | $18,000 | |
| Other Expenses | $65,000 | |
| Total | $2,030,000 | $2,030,000 |
The adjusting entries can also be shown in an additional column in the statement above.