After journalizing and posting all adjusting entries, next it prepares another trial balance from the ledger accounts. This is called an adjusted trial balance. Here we also discuss the purpose of adjusted trial balance.
Definition of adjusted trial balance
So adjusted trial balance is a list of account and their balance after the company has made all adjustment.
Its purpose is to prove the equality of the total debit balance and the total credit balance in the ledger after all adjustment the account in the adjusted trial balance contain all data that the company needs to prepare financial statements
The meaning and necessity of adjusting entries for the preparation of final account for a firm
The process throng which an amount of money is added or deducted to from the ledger balances to make the balance up to date is called adjustment
Adjustment entries are journaled entries made of the end of an accounting period or at any time financial statement is to be prepared to bring about a proper matching of revenue and expense
The Income statement of business reports all revenue earned and all expenses income to generate those revenues during a given period. An income statement that does not report all revenues and expenses in incomplete inaccurate and possibly misleading.
Similarly, a balance sheet that does not report all of an entity assets liabilities and stockholders equity at a specific time may be misleading and does not reflect the true financial position.
Purpose of adjusted trial balance
- To make the income statements report the revenue or expense.
- To make the balance sheet report the proper asset or liability.
Thus every adjusting entry affects at least one income statement account and balance sheet account so the correctness of such profit or loss and financial position depends on the proper adjustment of income and expenditure.
Two generally accepted accounting principles that relate to adjusting the account
The two generally accepted accounting principles that relate to adjusting the accounts are as follow
- Revenue recognition principle: The revenue recognition principle which states that revenue should be recognized in the time period in which it is earned.
- Example: A customer buys a compact disk from a shop in the eastern plaza for $ 50 cash the shop realizes $ 50 as revenue.
- Matching principle: The matching principle which states that efforts expenses be matched with accomplishments revenues.
- Example: John corporation earned $ 50 billion against $ 40 billion expense so the after matching $ 10 billion is the net income.
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- Definition of adjusting entries
- Advantages and disadvantages of trial balance
- Rules of debit and Credit