Preparing the unadjusted trial balance is the fourth step in the accounting cycle.
A trial balance is a list of company accounts and their ending ledger balances.
Its primary purpose at this step is to make sure that debits equal credits.
The trial balance is prepared at the end of the accounting period.
As are all the subsequent steps in the accounting cycle.
The trial balance lists accounts in the following order; assets, liabilities, equity,
revenues, and expenses.
Before we look at how to prepare the trial balance let's revisit how we arrive at the ending balances in our ledger accounts.
Account balances are either debit balances or credit balances. There are no negative balances in accounting.
Balances are calculated by totaling the debit side of an account and totaling the credit side of an account.
Then subtract the smaller side from the larger.
This is the balance on the larger side.
An account can have only one balance.
In this example debits are 20,000 and credits are 9000.
So the balance in this account is an $11,000 debit.
In this example debits are 15,000 and credits are 17,000. So the balance in this account is a $2000 credit.
Now here's an example of a trial balance. Notice the account order is assets, liabilities, equity, revenues and finally, expenses.
Let's look at the details as to how we arrived at these balances.
So in this example,
all the debits totaled $18,300
and all of the credits totaled 10,250. Therefore the cash account has a debit balance of $8050.
So on the trial balance we would enter cash as the first account and $8050 in the debit column.
Then we would repeat this process for all of the other accounts that have balances.
Normally accounts that have no balances would not appear on the trial balance.
Some additional terminology that you should be aware of is the chart of accounts.
The chart of accounts are all of the accounts available for use in a company.
It is likely that accounts on the chart of accounts may not be used all of the time.
The chart of accounts is not the same thing as a trial balance, which are the accounts that are used and have balances.
Here is a short example of a chart of accounts.
In academia we identify accounts by their names like cash or service revenue but in real life, in an accounting information systems, accounts are
identified by an assigned account number, like 100 or 400.
So much of what we've covered in this video deals with the trial balance in general. I'd like to identify why this is an unadjusted trial balance.
Specifically, other than telling us
the balances of our ledger account at this time
and whether or not our debits equal our credits, the adjusted trial balance doesn't tell us very much.
For example, look at the supplies balance.
That balance has likely come from the purchase of supplies during the month.
However, it may not be the amount of supplies on hand at the end of the month, if we've used some of them.
So there are limitations to the adjusted trial balance including:
some transactions may not have journalized;
the correct journal entry might not have been posted;
a journal entry may have been entered or posted twice;
incorrect accounts may have been used in the journalizing or posting of transactions;
or offsetting errors are made are in the recording of the transactions.
In fact, this is why we need to perform the next step in the accounting cycle, adjusting journal entries,
so we can adjust the account balances to more accurately reflect the financial position of a company.
And that concludes this short video on preparing the unadjusted trial balance.