Study: Prepare Pre-Adjusted Trial Balance
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Slides 1-4 (1m:47s)
Links to an external site.
Welcome to Introduction to Accounting Preparing for a User’s Perspective
Prepare Pre-Adjusted Trial Balance
In prior videos we learned how to identify economic transactions, analyze them, determining their increase or decrease effects on various accounts, converted that into debit and credit journal entries in the general journal, posted the journal entries to the account ledgers so their balances could be determined, and now we are ready to prepare the pre-adjusted trial balance to make sure that the total debit balances equal the total credit balances for all accounts. We do that so we don’t leave a mistake in the accounts before we go too far. It winds up saving us time if we can catch mistakes earlier rather than later.
This [the following diagram] is just a visual summary of what we just said.
We identified transactions, analyzed them, recorded them in the general journal, posted them to the general ledger, and now we are ready to prepare the pre-adjusted trial balance, after which we will do the adjusting entries, analyze, record, post and prepare the adjusted trial balance, and prepare the financial statements, and then we’ll go through and close all temporary accounts, recording them, posting them, and preparing a post-closing trial balance.
You should recall this [the following] diagram from the prior video. This is every single ledger account in the business that we dealt with so far and their respective debit or credit balances.
What we’re now going to do is we’re going to take all the debits, add them up on a list, and all the credits, add them up on the same list, and we’re going to take the total of all debits, which is going to be $268,800 and deduct all of the credits, which will also be $268,800, and the sum of that is $0, so debits show as positive numbers and credits show as negative numbers when we prepare the trial balance.
Slides 5-8 (2m:01s)
Links to an external site.So to prepare the pre-adjusted trial balance, we simply get the account balances of all the accounts, and if it is a debit in the account balance, put a debit as a positive number here [in the balance column], if it’s a credit as an account balance, we put it as a negative number over here [in the balance column]. The parenthesis indicates a negative [as well as a credit balance].
It’s a very mechanical process so I don’t need to say a lot about the process. Just take the numbers and move them over.
Completing that we’ll see that the total adds up to zero meaning the debits were exactly equal to credits, and “Hooray!!! It balances.”
Next we'll go through those five recurring steps of the accounting cycle, but we’re going to do it with adjusting entries because some of these accounts, for example, prepaid insurance, maybe we’ve used up some of this prepaid insurance and it needs to be expensed. Maybe we need to depreciate the building because we have used it for one month. Maybe we need to record interest expense for interest on this note payable for one month. So there’s some adjusting entries we will need to record in order to properly state these accounts to be used in the actual financial statements.
Here’s another way [noted below] of looking at the same thing using the actual ledgers themselves rather than the T-accounts but they effectively say the same thing as you can see here, $41,100 debit [per the cash ledger] and $41,100 debit [as included in the pre-adjusted trial balance]. So, I am not going to through all those arrows over there but you should get the idea that it’s the same process and once again “Hooray!!! It balances” because it’s all the same data.
So, what we just finished is these five steps up though the pre-adjusted trial balance. Now some of the accounts in the pre-adjusted trial balance are not yet adjusted for accrual accounting. The revenue recognition principle and the matching principle may indicate that some of them need adjusting entries so that they are correct. By recording the adjusting entries we’ll go through that process again to get to the adjusted trial balance and thereby be able to prepare the financial statements and then we will continue with the closing entries later on.
So that’s it for this, “Prepare Pre-Adjusted Trial Balance”.
I hope it made sense to you.
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