An adjusted trial balance includes a series of transactions that are used to correct errors and reallocate values. A trial balance is a completed list of all of the general ledger accounts used to track business activity and their values. The trial balance is used to create the income statement, balance sheet and cash flow documents. All these reports form the financial statements that are issued to investors, financing companies and business owners.
When a business is started, general ledger accounts are created to account for the different activities that are required to run a business. The actual account names can vary, but the primary purpose of the accounts is standard. Every business needs to keep track of cash, accounts payable and receivable, payroll, loans and the amount invested in the business.
At the end of the fiscal year, the trial balance is reviewed to ensure that the values in each account are accurate and complete. During this process, errors and omissions can be identified. A list or journal of the errors is created and managed by the accountant as part of the review process. The impact of these changes can be seen in the adjusted trial balance.
Some required adjustments to the trial balance accounts are not focused on error corrections, but on clarification. For example, a single account for investments can be used to track all investment activity. If there were a mix of long-term and short-term investments during the year, it might be better to create separate general ledger accounts and adjust the values to reflect this separation. This change will increase clarity and can be used to track performance over the long term.
There are internationally accepted standards that govern decisions about what is included in the trial balance, approved adjustments and procedures for common scenarios. These generally accepted accounting procedures (GAAP) are quite detailed and provide instructions to ensure there is consistency in financial reporting. The financial statement notes should list any deviations from GAAP.
Before the accounting records are closed for the year, the list of correcting entries are posted in the accounting system. These adjusting entries have a direct impact on the financial statements and usually are maintained in a separate document or binder. Each entry includes reference to supporting documentation or an explanation for the adjustment. In some circumstances, the adjustments cannot be posted in the financial system but are made directly on the trial balance.
The final version, after all of the adjustments have been made, is known as the adjusted trial balance. Reconciliation between the original and adjusted versions should include all of the transactions listed on the adjusting journal. The financial statements can then be issued, using the values and accounts listed in the adjusted trial balance.