Why the Adjusted Trial Balance Contains Information Pertaining to Accruals and Deferrals
As a business owner or accountant, the adjusted trial balance is an essential part of your financial statements. It provides the most accurate picture of your company’s financial position, including information on accruals and deferrals. In this article, we will explain what accruals and deferrals are and how they affect your business. We will also explore why the adjusted trial balance is necessary to ensure that your financial statements are accurate and complete.
What are Accruals and Deferrals?
Accruals and deferrals are accounting terms that help to ensure that revenue and expenses are recognized in the correct accounting period.
Accruals refer to revenue or expenses that have been earned or incurred but have not yet been recorded. For example, if you provide a service to a customer in December but do not receive payment until January, the revenue should be accrued in December, even though it has not yet been received.
Deferrals, on the other hand, refer to revenue or expenses that have been received or paid but should not be recognized until a later accounting period. For example, if you pay for insurance coverage for the next year in December, the expense should be deferred and recognized over the course of the year.
Why the Adjusted Trial Balance Matters
The adjusted trial balance is the final step in the accounting cycle, and it is crucial for ensuring that your financial statements are accurate and complete. The adjusted trial balance takes into account all the adjustments made for accruals and deferrals, as well as any other adjustments such as depreciation or bad debt expense.
Without an adjusted trial balance, you would be unable to accurately prepare your financial statements, and your company’s financial position would be unclear. For example, if you did not adjust for accrued revenue or expenses, your income statement and balance sheet would not accurately reflect your company’s profitability or financial situation.
Examples of Accruals and Deferrals
Let’s take a look at some examples of accruals and deferrals to better understand their impact on your financial statements.
Example 1: Accrued Revenue
ABC Company provides services to a customer in December but does not receive payment until January. The revenue for the service should be accrued in December since the service was provided and earned during that period. Without this adjustment, the revenue would not be reflected on the income statement for December, and the company’s profitability would be understated.
Example 2: Deferred Expenses
XYZ Company pays for an insurance policy that covers the next year in December. The expense for the insurance policy should be recognized over the course of the year, even though it was paid for in December. Without this adjustment, the expense would be overstated in December, and the company’s profitability would be understated.
Conclusion
Accruals and deferrals are essential accounting concepts that ensure that revenue and expenses are recognized in the correct accounting period. The adjusted trial balance is necessary to ensure that your financial statements accurately reflect your company’s financial position, taking into account any adjustments for accruals and deferrals, as well as other adjustments such as depreciation or bad debt expense. By understanding these concepts and the importance of the adjusted trial balance, you can ensure that your financial statements are accurate and complete, providing a clear picture of your company’s financial health.
