At the end of a business’s accounting cycle, they generate financial statements to evaluate their financial health and overall performance. These statements are the bedrock of a business’s financial reporting.
But before financial statements are generated, the business needs to summarize the financial history of the accounting period and generate the numbers that are reported on each statement.
To do so, they create an unadjusted trial balance, the initial version of the trial balance list. Here’s what you need to know about what the document is and how to create one.
What is unadjusted trial balance?
In double-entry accounting, an unadjusted trial balance is a list of all the accounts in your general ledger and their balances at a specific point in time, before any adjusting entries are made. Included in the unadjusted trial balance is a sum of all debits and credits to ensure they are equal and the books are balanced.
Generating an unadjusted trial balance is a step in the accounting cycle that takes place before creating financial statements.
Their purpose and importance
The unadjusted trial balance acts as a summary of all accounts at the end of a reporting period. The purpose of the unadjusted trial balance is to:
- Verify accuracy: Total debits must equal total credits for books to be “balanced.” If you generate an unadjusted trial balance and this isn’t true, it’s time to review your work.
- Locate potential errors: When reviewing account balances at a glance, some may jump out as being higher or lower than anticipated, indicating you should review that ledger account.
- Generating financial statements: Unadjusted trial balances are the first step in the process of generating financial statements such as the income statement and balance sheet.
If you use accounting software, the unadjusted trial balance is likely being generated in the backend with your knowing. But for those who prefer manual processes, the unadjusted trial balance is an essential checkpoint in closing the accounting cycle.
How to prepare an unadjusted trial balance
To prepare an unadjusted trial balance, you’ll need the general ledger and the chart of accounts. Once you have both, complete the following steps:
- Unadjusted trial balances are typically generated in a spreadsheet; if so, you’ll need three columns—one each for the account name, debit, and credit
- List all accounts from your chart of accounts in the account name column
- Identify whether the account is an asset, liability, equity, income, or expense account
- Using the general ledger, sum up the total balance for each account and add any necessary text
- Record the balance in the debit column if the account is an asset or expense account
- Record the balance in the credit column if the account is a liability, equity, or income account
- Sum up the total of the debits and credits as a total at the bottom of the sheet
- Confirm that the debit and credit balances are equal and troubleshoot if they aren’t
Keeping an up-to-date general ledger is an important part of streamlining the unadjusted trial balance process. If you lag behind on updating your general ledger, you’ll need to dedicate time to ensure every transaction is reported on this essential document.
The importance of accuracy and completeness
It may not seem like it at first glance, but the unadjusted trial balance is foundational to multiple facets of a business’s financial reporting. Two financial statements (the income statement and balance sheet) are built off of the unadjusted trial balance.
If your unadjusted trial balance is incorrect, so too are your main financial statements.
Generating an unadjusted trial balance also helps you identify where a mistake may have been made in your day-to-day bookkeeping. If you see a balance is abnormally large or small, something may have been recorded incorrectly.
Once you’ve reviewed your work and ensured it’s accurate, you’re ready to create adjusting entries and generate the financial statements that are commonly used to evaluate a business’s financial health.
When and why to use an unadjusted trial balance?
The unadjusted trial balance should be a regular part of your accounting cycle. So when and why should you generate one? Let’s break it down.
When to use an unadjusted trial balance?
Businesses should use an unadjusted trial balance at the end of its accounting period, before generating financial statements. This could be a monthly, quarterly, or annual process depending on the size and complexity of the business’s financial reporting.
Unadjusted trial balances could also be used outside of the accounting cycle to generate financial statements for a specific period of time, like an income statement that covers a two-week period of a sale.
Why use an unadjusted trial balance?
Businesses should use an unadjusted trial balance to get a bird’s eye view of their account balances before making adjustments and finalizing their numbers for the accounting period.
Since no adjustments have been made, the numbers are the result of the transactions recorded in the accounting period. This makes it easy to see where there may have been a mistake.
Once the balances are confirmed, you’re ready to make adjustments and generate financial statements.
Adjusted vs unadjusted trial balance
While the unadjusted trial balance is a step in the process, it’s the adjusted trial balance that’s the end goal.
An adjusted trial balance builds off of the unadjusted trial balance with adjusting entries. Adjusting entries are journal entries recorded at the end of an accounting period to account for non-financial transactions that are not recorded on a daily basis.
Think of an unadjusted trial balance like a route tracker after a run—it will summarize parts of the journey such as the distance you traveled and the route you took. Adjusting entries would be where you get to add in the details to give a more accurate picture, like the steepness of a hill or the direction of the wind.
Some examples of adjusting entries include recording accrued expenses, accrued revenue, allowance for doubtful accounts, depreciation, and amortization.
Once all adjusting entries are made, the trial balance becomes an adjusted trial balance.
Importance of adjusting entries in financial reporting
In some cases, how a revenue or expense is recorded doesn’t accurately reflect the business process they are involved in.
For example, say a business buys an annual subscription for software that’ll be used throughout the year. Intuitively, it doesn’t make sense for that cost to be recorded solely in January given that it provides value throughout the year.
This is an example of a prepaid expense. In this case, the business would record the purchase as an asset on the balance sheet and make adjusting entries every month to spread the expense over the useful life of the subscription.
At the end of the month, an adjusting entry would record one month’s worth of the expense to the expense account, thus amortizing it over the year.
Adjusting entries are an important part of how businesses create financial statements that most accurately reflect their operations and give them the clearest picture of their financial health.
Example of an unadjusted trial balance
To understand unadjusted trial balances on a deeper level, let’s look at an example and break it down into its individual parts.
Sample unadjusted trial balance with detailed explanations
Below is a simple example of an unadjusted trial balance.
Crucially, the sum of both columns is $152,000 meaning the debits and credits are balanced out.
All line items from cash to retained earnings are values that show up on the balance sheet. These are examples of what a business would own or owe as part of their day-to-day operations.
If a balance is in the debit section, it’s an asset (what the business owns). Comparatively, a value in the credit indicates it’s a liability (what the business owes).
From sales revenue down are examples of revenues and expenses. In this case, a credit balance represents revenue while a debit balance represents expenses.
Once the unadjusted trial balance is generated, the business reviews for errors before making the final adjusting entries.
Interpreting the trial balance to identify potential errors
The first place you should look to identify potential errors is the totals at the bottom of the unadjusted trial balance. If the credits and debits aren’t equal, there’s a problem that needs to be identified and fixed.
If the credits and debits balance, you should go through line-by-line to confirm each account balance is accurate.
Much of this can be confirmed with secondary sources. For example, you could confirm your cash balance by looking at your bank accounts and cash on hand.
It’s also worthwhile to look back at past financial statements to see if the account balances are abnormally high or low. It’s possible there was an error in data entry that has inflated or shrunk a balance beyond its usual value.
Ultimately, every account balance should pass the gut check. If something looks abnormal at first glance, it’s always worth digging into the data to see what’s up before finalizing the document and generating financial statements.
Best practices for effective financial transaction management
At its core, the unadjusted trial balance is a summation of your financial transactions. To improve the workflows surrounding unadjusted trial balances, look to improve your financial transaction management.
To improve the accuracy and efficiency of your financial management, consider the following:
- Make and stick to a schedule: You should be regularly recording and reviewing financial transactions. Choose a day of the week or time of day that’ll be dedicated to getting your reporting up-to-date.
- Reconcile regularly: Compare your transaction history in the general ledger against bank accounts and credit cards to ensure nothing slipped through the cracks.
- Collect documentation: Every receipt, invoice, purchase order, and statement should be considered necessary for collection so no detail goes missed.
- Get your team on the same page: Have a set process and make sure everyone is complying.
- Embrace automation: Save the time, effort, and potential errors of manual work by using a solution that automatically records transactions as they happen.
Utilizing technology and automation for streamlined processes
Turn your transactions into insights faster with BILL, a financial operations platform that helps businesses grow. Use automation to streamline everything like managing expenses, setting budgets, and processing payments.
With a full suite of tools, you’ll be empowered to maximize your financial success. Reach out to schedule a demo and learn how BILL will make you excited to check your trial balances at the end of the month.
