Unit 1 Chapter F:3 LO5

Introduction to Adjusted Trial Balance

• The video tutorial aims to address:
  • The purpose of the adjusted trial balance
  • How to prepare the adjusted trial balance

Summary of Previous Lessons

• The end of the accounting period process begins with an unadjusted trial balance.
• Unadjusted Trial Balance:
  • A list of all accounts.
  • Serves as proof for debits and credits but is often inaccurate due to incomplete amounts.
• These incomplete amounts do not include several revenue and expense transactions that require adjusting entries.

Accrual Basis Accounting

• Two primary questions to consider:
  1. Are there any revenues earned by Smart Touch Learning that haven’t been recorded?
  2. Are there any expenses incurred that have not yet been journalized?

Types of Adjusting Entries

• Four main types of adjusting entries:
  1. Deferred Expenses:
  • Transactions where cash payments occur before recording related expenses.
  • Example: Prepaid Expense (e.g., prepaying rent).
    • Original entry: cash is paid for rent.
    • Adjusting entry:
      • Increase Rent Expense.
      • Decrease Prepaid Expense (asset).
  1. Depreciation:
  • Initially recorded as an asset (e.g., furniture).
  • Adjusting entry at the end of the period:
    • Record Depreciation Expense.
    • Increase Accumulated Depreciation (contra asset account).
  1. Unearned Revenues:
  • Cash receipt is recorded first.
  • Revenue is recognized later when the service is performed or the good is delivered.
  1. Accrued Expenses:
  • Expenses are recorded now but cash payment occurs later (e.g., salaries).
  1. Accrued Revenues:
  • Revenue is recognized because it has been earned, but cash payment will occur later.

Rules for Adjusting Entries

• Rule 1: Adjusting entries never involve the cash account.
  • In prior lessons, cash was never debited or credited in any adjusting entries.
• Rule 2: Adjusting entries affect revenue and expense accounts.
  • They either:
  • Increase a revenue account (credit revenue).
  • Increase an expense account (debit expense).

Review of Adjusting Entries

• Key highlights regarding adjusting entries shown previously:
  • All entries made at the end of the period (December 31).
  • Each adjusting entry involves:
  • Debiting an expense account or
  • Crediting a revenue account.
  • None of the entries involved cash.

Post-Adjustment Balances

• After recording all adjusting entries:
  • All accounts should be current and reflect accurate balances.
  • Accounting equation must always balance:
  • Total Assets = Total Liabilities + Total Equity.
• For Smart Touch Learning as of December 31:
  • Total Assets: $113,550.
  • Total Liabilities: $62,000 (all credit balances).
  • Total Equity: $51,550 (calculated by adding credit balances and subtracting debit balances).
  • Balance confirmation:
  • $113,550 (Assets) = $113,550 (Liabilities + Equity).

Preparing the Adjusted Trial Balance

• After adjusting entries, prepare the Adjusted Trial Balance:
  • It consists of all accounts with their updated balances post-adjustments.
• Comparison between Unadjusted and Adjusted Trial Balances:
  • Adjusted trial balance may have more accounts than unadjusted.
  • Example of additions:
  • Depreciation Expense appears in adjusted balance.
  • Changes in account balances due to adjusting entries:
  • Accounts Receivable: increased from $1,000 to $1,800 due to accrued revenue entry.
  • Office Supplies: decreased from $500 to $100 due to usage adjustments.

Importance of Trial Balance

• Purpose of a trial balance is to ensure total debits equal total credits.
  • Even if totals are equal in the adjusted trial balance, mistakes may still exist:
  • Incorrect amounts could lead to equal debits and credits but still have discrepancies in balances.
  • Potential to forget to record an adjustment altogether, leading to incorrect account balances even with equal totals.