How to prepare the Adjusted Trial Balance

Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements

What you need

• An unadjusted trial balance that already balances for Perniagaan Setia as at 31 December 2023.
• A complete list of period-end adjustments (accrued expenses, prepaid expenses, depreciation, and so on).
• An understanding of double entry (debit and credit) and account types: assets, liabilities, revenue and expenses.
• The relevant ledger accounts to be updated with the adjustments.

Step by step

1. 1

   Check the unadjusted trial balance

   Start with Perniagaan Setia's unadjusted trial balance as at 31 December 2023, which already balances. Among the balances: Salaries expense RM12,000 (debit), Insurance expense RM1,800 (debit), Fittings RM10,000 (debit) and Accumulated depreciation of fittings RM2,000 (credit). Confirm total debits equal total credits before any adjustment, because it is the basis of the adjusted trial balance.

2. 2

   List all the adjustments

   Gather every adjustment at 31 December 2023: (a) accrued salaries RM800 not yet paid; (b) prepaid insurance RM300; and (c) depreciation of fittings RM1,000 for the year. For each one, identify the two accounts involved and whether an existing account is updated or a new account is created.

3. 3

   Record the accrued salaries adjustment

   Record accrued salaries with Debit Salaries expense RM800; Credit Accrued salaries RM800. Salaries expense rises to RM12,000 + RM800 = RM12,800 (debit), while a new account Accrued salaries RM800 is created as a current liability (credit).

4. 4

   Record the prepaid insurance adjustment

   Record prepaid insurance with Debit Prepaid insurance RM300; Credit Insurance expense RM300. Insurance expense falls to RM1,800 − RM300 = RM1,500 (debit), while a new account Prepaid insurance RM300 is created as a current asset (debit).

5. 5

   Record the depreciation adjustment

   Record depreciation with Debit Depreciation of fittings expense RM1,000; Credit Accumulated depreciation of fittings RM1,000. A new account Depreciation of fittings expense RM1,000 (debit) is created, and Accumulated depreciation of fittings rises to RM2,000 + RM1,000 = RM3,000 (credit). The cost of Fittings stays at RM10,000 and is not reduced directly.

6. 6

   Update and re-list the accounts

   Transfer the new balances into the Adjusted Trial Balance. The debit column now includes Salaries expense RM12,800, Insurance expense RM1,500, Prepaid insurance RM300, Fittings RM10,000 and Depreciation of fittings expense RM1,000. The credit column includes Accrued salaries RM800 and Accumulated depreciation of fittings RM3,000. Accounts unaffected by adjustments are listed unchanged.

7. 7

   Total and confirm the balance

   Total both columns. Because every adjustment is recorded by double entry, total debits must equal total credits. If it balances, the Adjusted Trial Balance is ready for preparing the Income Statement and the Statement of Financial Position. If it does not balance, re-check each adjustment entry to trace the error.

Second example

In another example, Kedai Harmoni prepares an Adjusted Trial Balance as at 31 December 2023 with a provision for doubtful debts adjustment. Debtors total RM8,000 and the owner decides on a provision of 5%, that is RM400. The adjustment is Debit Provision for doubtful debts expense RM400; Credit Provision for doubtful debts RM400. The new account Provision for doubtful debts expense RM400 is entered in the debit column, while Provision for doubtful debts RM400 is entered in the credit column. Because both columns rise by the same RM400, the Adjusted Trial Balance stays balanced.

Suppose Kedai Harmoni also earned rental income of RM600 that was not yet received at period end. The adjustment is Debit Accrued rent RM600; Credit Rental income RM600. Accrued rent RM600 is recorded as a current asset in the debit column and Rental income rises by RM600 in the credit column, so the Adjusted Trial Balance still balances.

Common mistakes

Related chapter: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements →

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