Preparing the unadjusted trial balance is the fourth step in the accounting cycle.
A trial balance is a list of the 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 we subtract the smaller side from the larger side ending up with the balance of the larger side.
An account can have only one balance.
Let's look at some examples.
In this example, debits are 20,000 and credits are 9,000.
So the balance in this account is $11,000 debit balance.
In this example, debits are 15,000 and credits are 17,000.
So the balance in this account is a $2000 credit balance.
Some additional terminology that should be aware of is the chart of accounts. The chart of accounts is a listing of all of the accounts available for use by a company. It is likely that some of the accounts in the chart of accounts may not be used all the time. The chart of accounts is not the same thing as a trial balance.
The Unadjusted Trial Balance is a listing of all the accounts with their current balances as of the date this record is prepared. Normally accounts that have no balances would not appear on the trial balance.
The account order of the Trial Balance is assets, liabilities, equity, revenues and finally expenses.
I'd like to identify why this is an unadjusted trial balance.
Specificall, other than telling us the balances of our ledger accounts at this time, and whether or not our debits equal our credits, the adjusted trial balance doesn't tell us very much. 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 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.