4 5: Prepare Financial Statements Using the Adjusted Trial Balance Business LibreTexts

To prepare the financial statements, a company will look at the adjusted trial balance for account information. From this information, the company will begin constructing each of the statements, beginning with the income statement. Income statements will include all revenue and expense accounts. The statement of retained earnings will include beginning retained earnings, any net income (loss) (found on the income statement), and dividends.

Presentation differences are most noticeable between the two forms of GAAP in the Balance Sheet. Under US GAAP there is no https://quickbooks-payroll.org/cash-vs-accrual-accounting-for-non-profits-which/ specific requirement on how accounts should be presented. Liquidity refers to how easily an item can be converted to cash.

The adjusted trial balance is key to accurate financial statements

Remember that the balance sheet represents the

accounting equation, where assets equal liabilities plus

stockholders’ equity. The statement of retained earnings always leads with beginning

retained earnings. Beginning retained earnings carry over from the

previous period’s Whai is Law Firm Accounting: Best practice ending retained earnings balance. Since this is

the first month of business for Printing Plus, there is no

beginning retained earnings balance. Notice the net income of

$4,665 from the income statement is carried over to the statement

of retained earnings.

His consulting practice will be recognized as service revenue and will provide additional revenue while he develops his barbering practice. We have gone through the entire accounting cycle for Printing Plus with the steps spread over three chapters. Let’s go through the complete accounting cycle for another company here. Did we continue to follow the rules of adjusting entries in these two examples?

What is an unadjusted trial balance?

An unadjusted trial balance is what you get when you calculate account balances for each individual account in your books over a particular period of time. If you’ve ever wondered how accountants turn your raw financial data into readable financial reports, the trial balance is how. The trial balance is a list of all your business’ ledger accounts, and how much each of those accounts changed over a particular period of time. You may have also heard it referred to as a trial balance sheet as it should be one worksheet summarizing all of your activity for a certain period in time. The trial balance information for Printing Plus is shown previously. If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000.

For example, a company performs landscaping services in the amount of $1,500. At the period end, the company would record the following adjusting entry. Interest can be earned from bank account holdings, notes receivable, and some accounts receivables (depending on the contract). Interest had been accumulating during the period and needs to be adjusted to reflect interest earned at the end of the period.

Ten-Column Worksheets

This gives you the balance to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings. Closing entries prepare a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period. Closing, or clearing the balances, means returning the account to a zero balance. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income.

Once all accounts have balances in the adjusted trial

balance columns, add the debits and credits to make sure they are

equal. If

you check the adjusted trial balance for Printing Plus, you will

see the same equal balance is present. Looking at the income statement columns, we see that all revenue and expense accounts are listed in either the debit or credit column. This is a reminder that the income statement itself does not organize information into debits and credits, but we do use this presentation on a 10-column worksheet. The second entry requires expense accounts close to the Income Summary account. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary.