Principles of Financial Accounting: The Accounting Cycle - Preparing an, Unadjusted Trial Balance

What It Is

Preparing an unadjusted trial balance is a crucial step in the accounting cycle. It involves listing all general ledger accounts and their balances at a specific point in time, usually at the end of an accounting period. This process ensures that the accounting equation (Assets = Liabilities + Equity) is balanced and that all transactions have been recorded correctly. For example, if a company buys $10,000 of inventory on credit, the unadjusted trial balance will reflect the increase in inventory and the corresponding increase in accounts payable.

Key Concepts & Formulas

• Asset: A resource owned or controlled by the company, such as cash, inventory, or property. Example: If a company buys $5,000 of office equipment, the asset account "Office Equipment" will increase by $5,000.
• Liability: A debt or obligation owed by the company, such as accounts payable or loans payable. Example: If a company borrows $10,000 from a bank, the liability account "Loans Payable" will increase by $10,000.
• Equity: The owner's claim on the company's assets, including retained earnings and common stock. Example: If a company earns $5,000 in net income, the equity account "Retained Earnings" will increase by $5,000.
• Debit: A left-side entry in a T-account, increasing asset, expense, or drawing accounts. Example: If a company buys $5,000 of office supplies, the debit entry would be "Office Supplies" $5,000.
• Credit: A right-side entry in a T-account, increasing liability, equity, or revenue accounts. Example: If a company borrows $10,000 from a bank, the credit entry would be "Loans Payable" $10,000.
• Accounting Equation: Assets = Liabilities + Equity. Example: If a company has $10,000 in cash (asset) and $5,000 in accounts payable (liability), the accounting equation would be $10,000 = $5,000 + $5,000.
• Trial Balance: A list of all general ledger accounts and their balances at a specific point in time. Example: A company's unadjusted trial balance might include the following accounts: Cash $10,000, Accounts Payable $5,000, Office Equipment $5,000, etc.

Journal Entry Examples

1. Dr. Accounts Payable $5,000 Cr. Inventory $5,000

Explanation: When a company buys $5,000 of inventory on credit, the accounts payable account increases by $5,000, and the inventory account increases by $5,000.

1. Dr. Office Equipment $5,000 Cr. Cash $5,000

Explanation: When a company buys $5,000 of office equipment with cash, the office equipment account increases by $5,000, and the cash account decreases by $5,000.

Common Mistakes

1. Mistake: Confusing debits and credits for expense accounts. Correction: Remember that expenses are debited, but only if they are related to assets (e.g., depreciation). Otherwise, expenses are credited.
2. Mistake: Forgetting to update the accounting equation when recording transactions. Correction: Always update the accounting equation to ensure that Assets = Liabilities + Equity.
3. Mistake: Not distinguishing between normal and reversed balances. Correction: Remember that assets, expenses, and drawing accounts have normal balances on the debit side, while liabilities, equity, and revenue accounts have normal balances on the credit side.

Exam Tips

1. Tip: When preparing an unadjusted trial balance, make sure to include all general ledger accounts and their balances.
2. Tip: Be careful when recording transactions, as small mistakes can lead to large errors in the accounting equation.
3. Tip: Use the accounting equation to check your work and ensure that Assets = Liabilities + Equity.

Quick Practice

1. What is the adjusting entry for accrued salaries of $5,000? Answer: Dr. Salaries Expense $5,000, Cr. Salaries Payable $5,000 Explanation: When a company accrues salaries of $5,000, the salaries expense account increases by $5,000, and the salaries payable account increases by $5,000.

2. What is the journal entry for a company that borrows $10,000 from a bank? Answer: Dr. Cash $10,000, Cr. Loans Payable $10,000 Explanation: When a company borrows $10,000 from a bank, the cash account increases by $10,000, and the loans payable account increases by $10,000.

3. What is the unadjusted trial balance for a company that has $10,000 in cash, $5,000 in accounts payable, and $5,000 in office equipment? Answer: Cash $10,000, Accounts Payable $5,000, Office Equipment $5,000 Explanation: The unadjusted trial balance includes all general ledger accounts and their balances at a specific point in time.

Last-Minute Cram Sheet

1. Assets have normal balances on the debit side.
2. Liabilities have normal balances on the credit side.
3. Equity has normal balances on the credit side.
4. Expenses have normal balances on the debit side.
5. Revenue has normal balances on the credit side.
6. The accounting equation is Assets = Liabilities + Equity.
7. The trial balance is a list of all general ledger accounts and their balances.
8. Debits increase asset, expense, and drawing accounts.
9. Credits increase liability, equity, and revenue accounts.
10. Dividends are NOT an expense – they go directly to retained earnings.