Trial Balance Review and Adjustments

The trial balance is a preliminary accounting report listing all ledger account balances to ensure total debits equal total credits.

Reviewing the trial balance helps identify errors, omissions, and necessary adjusting entries before preparing financial statements.

Adjustments ensure compliance with the accrual basis of accounting and the matching principle, providing an accurate financial position.

Skipping trial balance adjustments can lead to misstated financial results and inaccurate balance sheet and income statement presentations.

Overview / Definition

A trial balance is an internal report that lists the balances of all general ledger accounts at a specific point in time.

It serves as the foundation for preparing accurate financial statements by confirming that total debits equal total credits.

The trial balance is typically reviewed before period-end closing to identify required adjusting, correcting, and closing entries.

Recognition and Measurement

Common Types of Adjustments:

✦ Accrual Adjustments: Record expenses and revenues incurred but not yet recorded (e.g., accrued salaries, accrued interest).

✦ Deferral Adjustments: Allocate previously recorded prepaid expenses or unearned revenues to the correct period.

✦ Depreciation and Amortization: Record the allocation of asset costs over their useful lives.

✦ Inventory Adjustments: Adjust cost of goods sold based on ending inventory balances.

✦ Error Corrections: Rectify data entry mistakes and classification errors identified during the trial balance review.

Example – Adjusting Entry for Accrued Salaries:

• Salaries Incurred but Unpaid: $4,000

Journal Entry:

debit Salaries Expense – 4,000credit Salaries Payable – 4,000

Example – Adjusting Entry for Prepaid Insurance:

• Annual Premium: $12,000 (Paid on January 1st)

• Monthly Amortization: $1,000

Journal Entry at Month-End:

debit Insurance Expense – 1,000

credit Prepaid Insurance – 1,000

Journal Entry Examples

1. Depreciation Adjustment:

debit Depreciation Expense – 5,000

credit Accumulated Depreciation – 5,000

2. Unearned Revenue Adjustment (Recognizing Earned Revenue):

debit Unearned Revenue – 2,500

credit Service Revenue – 2,500

3. Correction of Misposted Entry (Expense Recorded as Asset):

debit Expense Account – 3,000

credit Fixed Assets – 3,000

Disclosure Requirements

While the trial balance itself is not publicly disclosed, its review ensures that financial statements prepared for external reporting are accurate.

If material errors are discovered after financial statements have been issued, companies must disclose:

✦ The nature of the error.

✦ The impact on prior period financial statements.

✦ The corrective actions taken, including restatements if necessary.

This is typically disclosed under Prior Period Adjustments or Restatements in the financial statement notes.

IFRS Comparison

Criteria	US GAAP	IFRS
Trial Balance Requirement	Internal Control Only	Internal Control Only
Error Correction	Prior Period Adjustment	Restate Prior Period Financials
Disclosure of Errors	Required if Material	Required if Material
Adjustments for Accruals/Deferrals	Required	Required

Both frameworks emphasize ensuring all adjustments are recorded before financial statements are finalized to prevent misstatements.

Common Errors

✦ Failing to Record Adjusting Entries: Results in incomplete financial statements and non-compliance with accrual accounting.

✦ Uncorrected Errors in Trial Balance: Leads to inaccurate financial reporting and possible audit findings.

✦ Omitting Depreciation and Amortization Adjustments: Overstates asset values and net income.

✦ Misclassification of Accounts: Incorrect grouping of assets, liabilities, or expenses affecting financial statement presentation.

✦ Not Reconciling Trial Balance to General Ledger: Creates discrepancies between the trial balance and underlying accounting records.