The term unadjusted trial balance is nothing but basically a list of ledger accounts which includes the balances and is prepared after the preparation of general ledger but prior to the preparation of adjusting entries. In the accounting cycle, unadjusted trial balance is the third step and it is usually prepared towards the end of the accounting period. Once you have prepared the adjusting entries, an adjusted trial balance is supposed to be prepared which can be directly used for the preparation of financial statements.
Format of Unadjusted Trial Balance:
The unadjusted trial balance is made up of three columns. All the account names are supposed to be written in the very first column, the debit balances will go in the second column and the credit balance in the remaining third column. The accounts will be listed in the order in which they appear in the general ledger. A simple format of such an unadjusted trial balance is given below:
When preparing the unadjusted trial balance, one must remember that the total of the debit column should always be equal to the total of the credit column. If they are not equal or in agreement, this means that you have prepared the trial balance incorrectly or missed out on a few journal entries while transferring them to the ledger accounts.
In order to set up an unadjusted trial balance, you will first have to create a table with three columns either on a paper or spreadsheet program. Now, list the ending date of the period above the table. Label the first column as “Accounts” and it will include all the account names in the ledger. Label the second column as “Debit”, this column will show all the entries with debit balances. Label the final column as “Credit”. It will show all the balances of account that are credit on nature. Each account will either have a debit or credit balance, depending on the type of account.
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In the given example, the unadjusted trial balance is displayed at the first column, while in the second column is the number of all adjusting entries. The final column of the ledger shows the combination of the first two columns creating an adjusted trial balance. Debit balance includes assets and expenses and they are listed as positive numbers, whereas, credit balance includes liabilities, equity and revenue which are listed as negative numbers. These two balances are supposed to offset each other; hence the total of the two balances will always be equal to zero.
In the second format, the unadjusted trial balance might have a separate column for all the debit balances and an individual column for credit balances. This is to ensure that the sum total of debit balance is equal to that of credit.
January 30, 2020
|Fixed assets (net)||220,000||220,000|
|Cost of goods sold||290,000||290,000|
Purpose of unadjusted trial balance:
You might be wondering what is the real purpose of preparing an unadjusted trial balance?. The primary focus is to check the mathematical equality of credit and debit. How can one achieve the equality in both the columns? If you have recorded all the transactions in the general journal keeping in mind the double entry principle of bookkeeping and have appropriately transferred it to the ledger account, the total of the debit balance will surely match the total of the credit balance. On the flip side, if the trial balance is unbalanced, it indicates one or more of the errors that are listed below:
- A debit amount might have been incorrectly posted as a credit amount and similarly credit amount has been incorrectly posted as a debit amount.
- The balances of the ledger accounts might not have been correctly determined.
- You might have copied the balance of the ledger account incorrectly to the trial balance.
- There has been a mistake in calculating the total of debit or credit columns.
The errors mentioned above are some of the typical errors that you will face during and unbalanced trial balance. You should always remember that the error might still exist even if you see that the total of debit and credit columns of the trial balance match each other. Given below are a few examples of such errors:
- Transaction might not have been correctly analyzed and recorded. Say, for example, receipt of cash is incorrectly debited to another account instead of the cash transaction.
- You might have completely overlooked a transaction from the journal and ledger.
- The debit and credit amounts of a journal entry are equally overstated or understated.
These errors can occur to anyone and that is why when you are preparing a double-entry sheets, You should keep in mind that you are self-checking and leading towards a record that is completely accurate, without any errors. Some of these errors might not even be revealed by the trial balance, this includes errors such as omitting transactions, or recording repetitive entries in two accounts. Of course, an unbalanced trial balance will definitely show errors, whereas a balanced trial balance might have errors or might be error-free.
This brings us to the conclusion that if the trial balance is balanced, then the errors might or might not exist, but if the trial balance is not balanced then it will certainly have errors. You have to be very careful with the entries that you are placing the balance sheet to prevent such errors, or else the process can get time-consuming.