Definition
An extended trial balance is an advanced accounting tool used to ensure the accuracy of the ledger account balances. It not only lists these balances but also incorporates columns for adjustments, accruals, prepayments, and the final entries that will feed into the profit and loss account and balance sheet.
Structure of Extended Trial Balance
- Ledger Account Balances: Vertical listing of all balances from the ledger.
- Adjustments: Column for recording necessary adjustments to correct any discrepancies or account for missing transactions.
- Accruals: Column specifically for recognizing income and expenses that are earned or incurred but not yet recorded.
- Prepayments: Column for expenses paid in advance, which need to be allocated to the correct accounting period.
- Profit and Loss Account: Two final columns (debit and credit) summarizing entries relevant to the profit and loss account.
- Balance Sheet: Two last columns showing final entries for the balance sheet.
Examples
Example 1: Adjusting for Accrued Expenses
| Account | Ledger Balance | Adjustments | Accruals | Prepayments | Profit and Loss (Dr) | Profit and Loss (Cr) | Balance Sheet (Dr) | Balance Sheet (Cr) |
|---|---|---|---|---|---|---|---|---|
| Salaries Expense | $5,000 | - | $1,000 | - | $6,000 | - | - | - |
| Prepaid Rent | $12,000 | - | - | -$3,000 | - | - | $9,000 | - |
| Sales Revenue | $30,000 | - | - | - | - | $30,000 | - | - |
Example 2: Adjusting for Prepaid Expenses
| Account | Ledger Balance | Adjustments | Accruals | Prepayments | Profit and Loss (Dr) | Profit and Loss (Cr) | Balance Sheet (Dr) | Balance Sheet (Cr) |
|---|---|---|---|---|---|---|---|---|
| Insurance Expense | $2,000 | - | - | $500 | $2,500 | - | - | - |
| Unearned Revenue | $5,000 | - | $2,500 | - | - | $2,500 | - | $2,500 |
Frequently Asked Questions
What is the purpose of an extended trial balance?
The primary purpose of an extended trial balance is to ensure the ledger balances are accurate, taking into account all necessary adjustments, accruals, and prepayments. It helps in finalizing the profit and loss account and balance sheet for accurate financial statements.
How does an extended trial balance differ from a standard trial balance?
While a standard trial balance only lists the end balances of ledger accounts for verification, an extended trial balance includes columns for adjustments, accruals, prepayments, and the final entries for the profit and loss account and balance sheet.
What are some common adjustments made in extended trial balances?
Common adjustments include correcting errors, recognizing accrued expenses or revenues, adjusting for prepayments or unearned revenue, and allocating expenses to the correct accounting periods.
Related Terms
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Trial Balance: A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.
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Ledger Account: A book or other collection of financial accounts, representing a comprehensive record of the financial transactions made by a business.
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Accruals: Accounting entries that recognize revenue or expenses that have been earned or incurred, respectively, but not yet recorded in the books.
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Prepayments: Payments made in advance for goods or services to be received in the future, which need to be allocated correctly over the relevant periods.
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Profit and Loss Account: A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period.
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Balance Sheet: A financial statement that reports a company’s financial position, including assets, liabilities, and shareholders’ equity, at a specific point in time.
Online References
- Investopedia - Trial Balance
- AccountingCoach - Extended Trial Balance
- Corporate Finance Institute - Extended Trial Balance
Suggested Books for Further Studies
- “Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso.
- “Financial and Managerial Accounting” by John Wild and Ken Shaw.
- “Intermediate Accounting” by Donald E. Kieso, Terry D. Warfield, and Jerry J. Weygandt.
Accounting Basics: “Extended Trial Balance” Fundamentals Quiz
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