The Accounting Cycle and the
Unadjusted Trial Balance
The Unadjusted Trial Balance lists the account balances in the General Ledger. It is used to verify the balance of debits and credits, and to review the balances of each account in preparation of Adjusting Entries in the next step in the Accounting Cycle. Companies will generally prepare it on a monthly or quarterly basis, in addition to year end, to ensure accounts balance and adjusting entries are made timely throughout the year. An example appears below for Sunny Sunglasses Shop for January 2007. Sunny Sunglasses Shop
Unadjusted Trial Balance
January 31, 2007
It shows a listing of each account after one month of business activity in January of 2007. Notice the asset and expense accounts appear on the left side as debits, and the Liabilities, Owner's Equity, and Revenue accounts appear on the right side as credits. This format ensures that each side balances with the other according to the Accounting Equation.Sales and expenses are reported on the Income Statement. Income Statement accounts are called nominal or temporary accounts because they are closed, typically at year end. The Income Statement Balances are reported for the specific period, such as the year, and then closed to assets, liabilities, or Owner's Equity on the Balance Sheet. Closing entries generally occur at year-end to start the Income Statement balances at zero for the next year. We discuss closing entries later in the Accounting Cycle. Real or Permanent Accounts are accounts with ongoing balances and appear on the Balance Sheet as Assets, Liabilities, and Owner's Equity. Examples are Cash, Accounts Receivable, Loans Payable, and Owner's Equity. Retained Earnings represents the accumulated net earnings and losses of the business. Since this is the first year of operations for Sunny Sunglasses Shop, the balance is zero. Sunny will close Net Income to Retained Earnings at year end. | The Unadjusted Trial Balance serves two main purposes:It verifies the equality of the debits and credits. It provides a listing of each account balance to facilitate the adjusting entry process. |
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