The financial statements of a business are derived from base books of accounts namely the ledger and trial balance. While the ledger is a comprehensive account wise record of business transactions, it is followed by the trial balance which compiles the list of all account balances to verify that the books of accounts are in balance.
This article looks at meaning of and differences between two types of trial balance –unadjusted and adjusted trial balance.
Definitions and meanings
Unadjusted trial balance:
An unadjusted trial balance is a listing of all account balances derived from the respective ledger accounts prior to making any adjustments.
Every business determines the intervals at which it draws up its financial statements. This may be monthly, quarterly or even annually matching with the accounting period. At the end of each period, the ledger accounts are totaled and their balances are summarized in a trial balance. This first trial balance is an unadjusted trial balance.
The primary purpose of an unadjusted trial balance is to check arithmetical accuracy of the ledger accounts and to ensure that the books are in balance i.e., total of debits equals the total of credits. This is an essential step in a double entry accounting system.
Unadjusted trial balance is prepared in columnar format, with debit balances recorded in the left column and credit balances recorded in the right column.
Adjusted trial balance:
An adjusted trial balance is a trial balance that is prepared after incorporating period-end adjusting journal entries in an unadjusted trial balance.
Adjusting journal entries include adjustments made by accountants of the organisation as well by the auditors at the time of finalization of accounts. These can include:
- Period end accruals such as accrual of rent of the last month, accrual of pending utility bills etc
- Prepaid expense allocation of expenses paid for but not pertaining to the current period
- Adjustment for stock discrepancies identified during year end physical stock take
- Adjustments recommended by auditors to align books with accounting standards or rules
While an adjusted trial balance is also prepared in columnar format, it has additional columns for adjustments. The adjustments can be made directly in the trial balance or by passing adjusting entries through the respective ledger accounts.
An adjusted trial balance can be prepared several times before finalization to incorporate adjustments at different stages of the account and audit finalization.
Difference between unadjusted and adjusted trial balance:
The difference between unadjusted and adjusted trial balance has been detailed below:
- Unadjusted trial balance is the first list of ledger account balances, compiled without making any period end adjustments.
- Adjusted trial balance is the trial balance compiled after considering adjustment entries at the close of the accounting period.
2. Hierarchy in accounting cycle
- Unadjusted trial balance is prepared first after all ledger accounts are totaled and balanced at the period end.
- Adjusted trial balance is prepared after compilation of the unadjusted trial balance.
- Unadjusted trial balance does not include adjustment entries.
- Adjusted trial balance includes all adjustment entries.
- Unadjusted trial balance is prepared to check arithmetical accuracy of ledger accounts and to check that the books of accounts are in balance.
- Adjusted trial balance has a wider purpose of checking accounting accuracy of the books of accounts. It incorporates adjustments to align the accounting entries with accounting standards and principles.
- Unadjusted trial balance is less accurate presentation of account balances than an adjusted trial balance.
- Adjusted trial balance is more accurate as it makes adjustments for all entries that have been recorded but do not pertain to the current period and all entries that have not been recorded but pertain to the current period.
- An unadjusted trial balance has only version prepared once ledger accounts are totaled and balanced.
- An adjusted trial balance can have multiple versions as adjustments may be made at several stages of account and audit finalization.
7. Format and method of preparation
- Unadjusted trial balance is prepared in columnar format.
- Adjusted trial balance is also prepared in columnar format but has an additional column for adjustments. These adjustments can be made directly in the trial balance or through the ledger accounts subsequently posted to the adjusted trial balance.
Unadjusted trial balance versus adjusted trial balance – tabular comparison
A tabular comparison of unadjusted and adjusted trial balance is given below:
|First list of all account balances prepared from the ledger without considering the effect of any adjustment entries||Trial balance derived after considering the effect of adjustment entries|
|Hierarchy in accounting cycle|
|After ledger and before adjusted trial balance||After adjusted trial balance|
|Only account balances||Account balances and adjustment entries|
|To check arithmetical accuracy||To check arithmetical and accounting accuracy|
|Less accurate||More accurate|
|Single||Can be multiple|
|Format and method of preparation|
|Columnar format||Columnar format with additional columns for giving impact to period end adjusting entries|
Conclusion – unadjusted trial balance vs adjusted trial balance:
Fundamentally while a trial balance is essentially a check on arithmetical accuracy and balance check of ledger accounts, an adjusted trial balance can go beyond a mere arithmetic check. An adjusted trial balance accounts for all period end adjustments made by accountants and auditors to reflect more accurate account balances. An adjusted trial balance is thus more relevant from the point of view of preparing true and fair financial statements.