An extended trial balance is a vital tool accountants use to prepare accurate financial statements at the end of an accounting period. Unlike a regular trial balance, it includes additional columns for period-end adjustments, accruals, and prepayments, ensuring the accounts are fully updated. Common adjustments include depreciation, bad debt expense, inventory adjustments, and asset disposals.
The process begins with a list of all accounts from the general ledger, covering both balance sheet and income statement items. Adjustments bring accounts up to date, while accruals and prepayments record income or expenses earned, incurred, or paid in advance. The extended trial balance ultimately calculates the company’s net income or loss in the statement of profit or loss and summarizes assets, liabilities, and equity in the statement of financial position.
Extended Trial Balance
An extended trial balance is a crucial tool for accountants, used to prepare financial statements at the end of an accounting period. It expands on the traditional trial balance by including additional columns for adjustments, accruals, prepayments, and other items required to finalize the financial statements.
This guide explains the purpose, process, and benefits of the extended trial balance, providing detailed examples and practical insights to help accountants ensure accuracy in financial reporting.
What is an Extended Trial Balance?
An extended trial balance builds on the regular trial balance, which lists all account balances from the general ledger, including balance sheet accounts (assets, liabilities, and equity) and income statement accounts (revenues and expenses). The extended trial balance introduces columns for adjustments, accruals, and prepayments to calculate accurate period-end figures.
This worksheet is critical for ensuring that financial statements reflect the company’s true financial position and performance.
Purpose of an Extended Trial Balance
The extended trial balance serves three main purposes:
- Incorporate Adjustments: Record adjustments such as depreciation, accruals, and provisions to update account balances.
- Prepare Financial Statements: Produce draft versions of the income statement and balance sheet.
- Facilitate Accuracy: Identify and correct errors or discrepancies before finalizing financial statements.
How to Prepare an Extended Trial Balance
1. Start with a Trial Balance
List all accounts from the general ledger, including their debit and credit balances. Ensure that the total debits and credits are equal.
2. Record Adjustments
Use the adjustments column to update account balances for:
- Depreciation: Allocate the cost of fixed assets over their useful lives.
- Bad Debt Expense: Adjust for uncollectible accounts receivable.
- Provisions: Account for expected expenses, such as legal fees or warranties.
3. Include Accruals
Record items that have been earned or incurred but not yet recorded:
- Example: If wages of $1,000 are owed but not yet paid, add an accrual for this amount.
4. Account for Prepayments
Adjust for payments made in advance for future periods:
- Example: If $1,000 of prepaid rent remains unused, add it as an asset.
5. Calculate Profit or Loss
In the income statement column, subtract total expenses from total revenues to calculate net profit or loss.
6. Prepare the Balance Sheet
Summarize assets, liabilities, and equity in the balance sheet column:
- Equity = Total Assets – Total Liabilities.
Period-End Adjustments: Essential Entries
Period-end adjustments ensure financial statements reflect accurate and up-to-date information. These include:
- Accruals: Revenue or expenses earned/incurred but not recorded (e.g., unpaid wages).
- Deferrals: Revenue or expenses recorded in advance for future periods (e.g., prepaid insurance).
- Depreciation: Allocate asset costs over time.
- Provisions: Estimate liabilities for uncertain obligations (e.g., pending legal fees).
Example of an Extended Trial Balance
As an example, let’s say a company has the following accounts on its trial balance, and let’s see how the extended trial balance can be produced step by step:
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000 | – |
| Accounts Receivable | 5,000 | – |
| Inventory | 1,500 | |
| Prepaid Rent | 500 | – |
| Equipment | 30,500 | – |
| Accounts Payable | – | 7,500 |
| Wages Payable | – | – |
| Unearned Revenue | – | 2,000 |
| Capital | – | 30,500 |
| Revenue | – | 15,000 |
| Purchase | 3,000 | |
| Rent Expense | 2,500 | – |
| Wages Expense | 2,000 | – |
| Depreciation Expense | – | – |
| Total | 55,000 | 55,000 |
The following period-end adjustments are required to be done:
- A depreciation expense of $5,500 for the equipment is calculated, that will bringing the balance of equipment down to $25,000.
- A bad debt expense estimate of $500 for accounts receivable is decided, that will bringing the balance down to $4,500.
- The closing inventory balance is confirmed to be $3,000.
- Provision is established for legal fees, the amount is estimated to be $500.
- The accountant identified an accrual of $1,000 for wages earned but not yet paid.
- Prepayment of $1,000 for rent that has been paid in advance but not yet used.
After taking all the above adjustments into account, the extended trial balance will look like as follows;
Extended Trial Balance
| Account | Debit | Credit | Adjustments (Debit) | Adjustments (Credit) | Accruals (Debit) | Accruals (Credit) | Prepayments (Debit) | Prepayments (Credit) | Income Statement (Debit) | Income Statement (Credit) | Balance Sheet (Debit) | Balance Sheet (Credit) | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash | 10,000 | 10,000 | |||||||||||||||
| Accounts Receivable | 5,000 | 500 | 4,500 | ||||||||||||||
| Inventory | 1,500 | 3,000 (Closing Inv.) | 1,500(Opening Inv.) | 3,000 | |||||||||||||
| Prepaid Rent | 500 | 1,000 | 1,500 | ||||||||||||||
| Equipment | 30,500 | 5,500 | 25,000 | ||||||||||||||
| Accounts Payable | 7,500 | 7,500 | |||||||||||||||
| Wages Payable | 1,000 | 1,000 | |||||||||||||||
| Unearned Revenue | 2,000 | 2,000 | |||||||||||||||
| Capital | 30,500 | 30,500 | |||||||||||||||
| Revenue | 15,000 | 15,000 | |||||||||||||||
| Purchase | 3,000 | 3,000 | |||||||||||||||
| Rent Expense | 2,500 | 1,000 | 1,500 | ||||||||||||||
| Wages Expense | 2,000 | 1,000 | 3,000 | ||||||||||||||
| Bad debt Expenses | 500 | 500 | |||||||||||||||
| Depreciation Expense | 5,500 | 5,500 | |||||||||||||||
| Professional Fees Expense | 500 | 500 | |||||||||||||||
| Provisions | 500 | 500 | |||||||||||||||
| Cost of goods sold | 1,500 (Op. Inv.) 3,000(Purchase) | 3,000 (Closing Inv.) | 1,500 | ||||||||||||||
| Profit for the year | 2,500 | 2,500 | |||||||||||||||
| Total | 55,000 | 55,000 | 14,000 | 14,000 | 1,000 | 1,000 | 1,000 | 1,000 | 15,000 | 15,000 | 44,000 | 44,000 |
Note:
- In the statement of profit or loss column, the accountant would subtract all of the expenses from the revenues to arrive at a net income of $2,500 ($15,000 – $1,500 -$3,000 – $500 -$5,500 – $500 – $1,500).
- In the statement of financial position column, the accountant would add up all of the assets ($10,000 + $4,500 + $3,000 + $1,500 + $25,000 = $44,000) and all of the liabilities ($7,500 + $1,000 + $2,000 + $500 = $11,000), and subtract the total liabilities from the total assets to arrive at the company’s equity ($44,000 – $11,000 = $33,000). This $33,000 represents the company’s net worth or shareholders’ equity as of the end of the period. Which can also be calculated by adding the capital balance of $30,500 with the net income of the period $2,500. Which is ($30,500 + $2,500 = $33,000).
As shown above, by using an extended trial balance, accountants are able to make year-end adjustments, adjustment for accrual and prepayments, and produce a draft statement of financial position and statement of profit or loss. This helps the management and all other stakeholders to easily able to understand the company’s financial position and performance over the course of the period and make informed decisions about future investments and operations.
Key Takeaways
- An extended trial balance refines financial statements through adjustments, accruals, and prepayments.
- Period-end adjustments ensure accurate reporting, covering items like depreciation, bad debts, and provisions.
- The income statement calculates net profit or loss, while the balance sheet summarizes assets, liabilities, and equity.
- Extended trial balances provide critical insights for decision-making and financial accuracy.
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