Content Standard 8.6

Adjusted Trial Balance

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Explanation

The Adjusted Trial Balance is a list of all ledger account balances prepared after the year-end adjusting entries have been recorded and posted to the ledger. It follows on from the ordinary (unadjusted) Trial Balance: each adjustment such as accrued expenses, prepaid expenses, accrued income, unearned income, depreciation, bad debts, allowance for doubtful debts and closing inventory changes the balance of certain accounts or creates new accounts. Once the effects of all adjustments are included, the updated balances are re-listed in debit and credit columns. As with an ordinary trial balance, the total of the debit column must equal the total of the credit column.

The Learning Standard requires students to understand its meaning, its purpose, and how to prepare it after adjustments. In terms of meaning, it reflects the true position of every account at the end of the accounting period following the accrual basis and the matching concept, where income and expenses are recognised in the period in which they occur rather than only when cash is received or paid. Because adjustments change the original figures, the adjusted trial balance gives a more accurate picture than the original trial balance, which only records the year's transactions and ignores items not yet adjusted.

There are two main reasons why an Adjusted Trial Balance is needed. First, it checks the arithmetical accuracy of the ledger after adjustments; if the debit total does not equal the credit total, it signals an error in the adjusting entries or in computing the balances. Second, and most importantly, it is the direct source of figures for preparing the Statement of Income and the Statement of Financial Position. The adjusted balances of income and expense accounts are transferred to the Statement of Income, while the adjusted balances of asset, liability and equity accounts are transferred to the Statement of Financial Position. Without this step, the financial statements risk containing unadjusted figures that breach accounting principles.

Students must know which way each adjustment moves a balance. Accrued expenses increase the relevant expense balance and create a liability (Accrued Expense); prepaid expenses decrease the expense balance and create an asset (Prepaid Expense); accrued income increases income and creates an asset; unearned income decreases income and creates a liability. Depreciation increases the Depreciation Expense and the Accumulated Depreciation. Bad debts increase expenses and decrease Accounts Receivable. Closing inventory appears as a debit balance (asset) that did not exist in the original trial balance. All these changes must be applied correctly before the adjusted balances are listed.

It can be prepared using a worksheet containing an original Trial Balance column, an Adjustments column (debit and credit), and an Adjusted Trial Balance column. For each account row, the adjusted balance is computed by adding or subtracting the adjustment amount from the original balance according to the nature of the account. New accounts arising from adjustments, such as Accrued Expense, Prepaid Expense, Depreciation Expense and Closing Inventory, are added on blank rows. Finally the two adjusted trial balance columns are totalled and must balance. These figures are then used to complete the sole proprietor's financial statements.

Worked examples

Example 1: Effect of adjustments on balances (Sinar Maju Enterprise)

The Trial Balance at 31 December 2024 shows Salary Expense RM24,000 and Insurance Expense RM3,600. Adjustments: (i) Accrued salary RM2,000; (ii) Prepaid insurance RM600.

Accrued salary entry: Debit Salary Expense RM2,000; Credit Accrued Salary RM2,000. The adjusted Salary Expense becomes RM24,000 + RM2,000 = RM26,000, and a liability Accrued Salary RM2,000 arises.

Prepaid insurance entry: Debit Prepaid Insurance RM600; Credit Insurance Expense RM600. The adjusted Insurance Expense becomes RM3,600 - RM600 = RM3,000, and an asset Prepaid Insurance RM600 arises.

In the Adjusted Trial Balance: Salary Expense RM26,000 (Debit), Insurance Expense RM3,000 (Debit), Accrued Salary RM2,000 (Credit), Prepaid Insurance RM600 (Debit).

Example 2: Three-column worksheet extract (Harmoni Retail Store)

Original balances: Furniture RM20,000; Accumulated Depreciation of Furniture RM4,000; Accounts Receivable RM10,000. Adjustments: furniture depreciation 10% on cost = RM2,000; bad debts RM500.

Depreciation: Debit Depreciation Expense of Furniture RM2,000; Credit Accumulated Depreciation of Furniture RM2,000. Adjusted accumulated depreciation = RM4,000 + RM2,000 = RM6,000.

Bad debts: Debit Bad Debts Expense RM500; Credit Accounts Receivable RM500. Adjusted Accounts Receivable = RM10,000 - RM500 = RM9,500.

In the Adjusted Trial Balance column: Furniture RM20,000 (Dr), Accumulated Depreciation of Furniture RM6,000 (Cr), Accounts Receivable RM9,500 (Dr), Depreciation Expense of Furniture RM2,000 (Dr), Bad Debts Expense RM500 (Dr). Both columns must balance.

Practice

State the meaning of the Adjusted Trial Balance and two reasons for preparing it.

Answer: The Adjusted Trial Balance is a list of all ledger account balances prepared after the adjusting entries at the balance date have been recorded and posted to the ledger. Two reasons: (1) to check the arithmetical accuracy of the ledger after adjustments so that the debit total equals the credit total; (2) to provide the adjusted figures used directly to prepare the Statement of Income and the Statement of Financial Position on the accrual basis.

The Rent Expense balance in the trial balance is RM12,000. Accrued rent is RM1,000. Show the adjusting entry and state the adjusted balance and where it is reported.

Answer: Adjusting entry: Debit Rent Expense RM1,000; Credit Accrued Rent RM1,000. The adjusted Rent Expense = RM12,000 + RM1,000 = RM13,000, reported as an expense in the Statement of Income. Accrued Rent RM1,000 is a current liability, reported in the Statement of Financial Position.

Accounts Receivable is RM15,000. Bad debts RM600 and an allowance for doubtful debts of 5% on the net balance must be created. Compute the adjusted balances of Accounts Receivable and Allowance for Doubtful Debts.

Answer: Bad debts: Debit Bad Debts Expense RM600; Credit Accounts Receivable RM600. Adjusted Accounts Receivable = RM15,000 - RM600 = RM14,400. Allowance for Doubtful Debts = 5% x RM14,400 = RM720. Entry: Debit Allowance for Doubtful Debts Expense RM720; Credit Allowance for Doubtful Debts RM720. In the adjusted trial balance: Accounts Receivable RM14,400 (Debit) and Allowance for Doubtful Debts RM720 (Credit).

Explain why closing inventory appears in the Adjusted Trial Balance but not in the original trial balance.

Answer: Closing inventory is known only after the stock is counted at the balance date, that is after all the year's transactions have been recorded, so it is absent from the original trial balance. It is brought in through an adjusting entry: Debit Closing Inventory account; Credit Trading account (or reported in the Statement of Income). It therefore appears as a debit balance (a current asset) in the Adjusted Trial Balance and is reported in the Statement of Financial Position.

Exam tips

Key terms

Adjusted Trial Balance: A list of ledger account balances prepared after adjusting entries are recorded and posted.
Adjusting Entry: A double entry at the balance date to align income and expenses with the accrual basis.
Accrual Basis: The principle of recognising income and expenses in the period they occur, not when cash is received or paid.
Matching Concept: Expenses are matched against income in the same accounting period to determine the correct profit or loss.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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