The trial balance is a list of all the accounts a company uses with the balances in debit and credit columns. There are three types of trial balances: the unadjusted trial balance, the adjusted trial balance and the post- closing trial balance. All three have exactly the same format.
The unadjusted trial balance is prepared before adjusting journal entries are completed. This trial balance reflects all the activity recorded from day-to-day transactions and is used to analyze accounts when preparing adjusting entries. For example, if you know that the remaining balance in prepaid insurance should be $600, you can look at the unadjusted trial balance to see how much is currently in the account.
The adjusted trial balance is completed after the adjusting entries are completed. This trial balance has the final balances in all the accounts and is used to prepare the financial statements.
The post-closing trial balance shows the balances after the closing entries have been completed. This is your starting trial balance for the next year. We will discuss the post-closing trial balance in the post regarding closing entries.
Accounts in the trial balance are listed in a specific order to aid in the preparation of the financial statements. Accounts should be listed in the following order:
Assets and liabilities should be listed in order from most liquid to least liquid. Liquidity refers to how quickly an asset could be converted to cash and how quickly a liability will be paid off with cash. The most liquid asset is cash, because it has already been converted to cash (who knew?). Typically, the next most liquid asset is accounts receivable because most companies collect their receivables within 30 days.
You can also think of assets and liabilities in terms of current and long-term. A current asset is one that will most likely be used up in less than 12 months. A current liability is one that will be paid off in less than 12 months. Long-term assets and liabilities are those that will be on the trial balance for more than 12 months.
Here is a sample adjusted trial balance. Notice the accounts are listed in the order described above. You might be wondering why it is such a big deal to organize the trial balance in this manner. The purpose of the trial balance is to make your life easier when preparing financial statements. Look what happens when we divide the trial balance by statement.
This is the same trial balance but I have color coded it. The orange section is for the accounts that will be used on the balance sheet, the blue is the statement of retained earnings and the green is the income statement. Because we took the time to organize the accounts, the preparation of the financial statements will be so much easier.
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I have never emailed in response to anything posted online but I feel compelled to do so now. I have been having a hard time learning accounting at an online university. We are given an online book and a schedule of chapters to read. Beyond that, we have access to course mentors but they will not answer questions directly…Instead, they point you to a resource and leave the rest to you.
I have watched several other youtube videos, searching for a teacher who presents the information in a format I can understand. Thankfuly I stumbled across one of your videos and was shocked to realise that in 12 minutes I was able to comprehend something I had spent several hours trying to understand! That trend continues as I watch more of your videos and I finaly feel like I can pass this course.
I want to thank you for contributing your valuable time and expertise to making and posting these videos as a resource for the public. You are an amazing teacher!!!!
Thank you for this amazing comment. I can’t tell you how much it motivates me to keep developing new content.
I wanted to really thank you as well for the time and effort you have put into these videos. I textbook I have for this course is so dry and after watching your videos all the concepts have become so much more clear for me.
Thank you for your comment. I’m so glad I was able to help you with your course.
This is so helpful! You are a blessing. Please keep it up!
Glad I could help!
It is so amazing how simplistic you’ve made understanding accounting for me. Even though I’m not a graduate in any accounting field. You’ve made me a to-listen-to while I’m conversating in the midst of financial accountants. God bless you Kristin.
[…] no calculation is needed. We can simply take the amount from the cost of goods sold account on the trial balance. And you thought you could forget everything from financial […]
Nice post. It’s very informative and I’m sure a lot of people will find accounting easy as you have made us understand clearly. Keep up with the great content!
Interesting stuff to read. Keep it up.
Great information! I just had a quick question. When creating a trial balance for 2 months, e.g Jan & Feb, will the closing balances of the accounts for Jan, carry over to Feb or is each trial balance specific to the transactions that occurred in a month.
Closing entries are only done at the end of the year. Therefore the balances for January will carry over to February. However, if you have a system that allows you to run a trial balance for the month, the system will automatically show the updated retained earning balances so that the trial balance will balance. Computers are awesome!
Great post! So happy I found this, thank you.