A trial balance summarizes information in the general ledger and lists the accounts and their balances at a certain point in time. An unadjusted trial balance is a list of accounts and balances prior to adjustments being made for any adjusting entries at the end of the accounting period. Once the impact, or effect, of the adjusting entries is reflected in the accounts, the result is an adjusted trial balance. This adjusted trial balance is a list of general ledger accounts with proper balances after entries are posted in the ledger. The balances in the adjusted trial balance are used to prepare the financial statements.
The following are examples of the five types of adjusting entries: accrued revenue, accrued expense, unearned or deferred revenue, prepaid expense, and depreciation expense. This company is on a monthly period, though accumulated depreciation would not necessarily be recorded monthly but at the end of whatever period is set. The adjusting entries are then reflected and cross-referenced in the adjusting entries column in Adjusted Trial Balance July 31 Global Air.
1. Accrued Revenue: Global Air provides flights to a large corporate customer amounting to $10,000 on July 1. Global Air invoices the customer, and the payment is due August 10 (example of an accrued revenue). An adjusting entry for that is made on July 31.
Adjusting Entry Accounts Receivable
| Debit | Credit | |
|---|---|---|
| Accounts Receivable | $10,000 (a) | |
| Revenue | $10,000 (a) |
There is an increase in assets that will be reported on the balance sheet and an increase in revenue that will be reported on the income statement.
2. Accrued Expense: Global Air uses an outside company to perform maintenance on its aircraft during July totaling $1,000. The outside company invoices Global Air with a due date of August 15 (example of an accrued expense). An adjusting entry for that is made on July 31.
Adjusting Entry Maintenance Expense
| Debit | Credit | |
|---|---|---|
| Maintenance Expense | $1,000 (b) | |
| Accounts Payable | $1,000 (b) |
There is an increase in expenses (income statement) and liabilities (balance sheet).
3. Unearned or Deferred Revenue: Global Air receives $5,000 cash in ticket sales on July 1. Half of the flights occur in July, and the balance will occur in August (example of unearned or deferred revenue). An entry for the original cash is made on July 1.
Entry Unearned/Deferred Revenue
| Debit | Credit | |
|---|---|---|
| Cash | $5,000 | |
| Unearned Revenue | $5,000 |
Adjusting Entry Unearned/Deferred Revenue
| Debit | Credit | |
|---|---|---|
| Unearned Revenue | $2,500 (c) | |
| Revenue | $2,500 (c) |
The adjusting entry reduces liabilities (balance sheet) and revenue (income statement).
4. Prepaid Expense: Global Air pays $6,000 for insurance coverage for 6 months (July through December) on July 1 (example of a prepaid expense). The original cash entry is made on July 1.
Entry Prepaid Expense
| Debit | Credit | |
|---|---|---|
| Prepaid Expense | $6,000 | |
| Cash | $6,000 |
Adjusting Entry Prepaid Expense
| Debit | Credit | |
|---|---|---|
| Insurance Expense | $1,000 (d) | |
| Prepaid Expense | $1,000 (d) |
The adjusting entry increases expenses (income statement) and reduces assets (balance sheet).
5. Depreciation Expense: An adjusting entry for depreciation expense is made on July 31.
Adjusting Entry Depreciation Expense
| Debit | Credit | |
|---|---|---|
| Depreciation Expense, Boeing 737 | $350,000 (e) | |
| Accumulated Depreciation, Boeing 737 | $350,000 (e) |
The annual depreciation expense would be $84 million divided by 20 years, or $4.2 million. The monthly depreciation expense would be $4.2 million divided by 12 months, or $350,000. The entry increases expenses on the income statement and increases the contra account on the balance sheet.
Unadjusted trial balances are the account balances prior to the adjusting entries. Global Air's adjusted trial balance amounts for July 31 reflect the impact, or effect, of adjusting entries. The financial statements are then prepared from the adjusted trial balance amounts.