Extended trial balance explained

To get value from a trial balance, it is normal to extend or adjust it. This gives the rise to extended trial balance. This TB can help preparers of financial statements to do so seamlessly. In this article, we explain the term more fully.

1. What's extended trial balance

This is a TB that shows the adjustments affecting various accounts and how they reflect in the financial statements in compliance with IFRS or US GAAP. The trial balance shows various columns such as the accounts items and their figures, the necessary adjustment, profit or loss, and the balance sheet. 

The need for extended TB arises as a result of the accrual concept as well as IFRS standards or the US GAAP. Based on the accrual principle, it is said that the accountant must record income when they are earned rather than when it was received. Also, the expenses should be posted in the statements as they are incurred rather than as they are paid. 

This implies that if an income for a year is 10 million Naira, but 12 million Naira is in the book, it should be adjusted by 2 million arrived at the actual income earned. This is also true with expenses. Therefore, with the help of the TB adjustments, the impact can be done to reflect how it will affect the financial statements when they are prepared.

2. Columns in the extended trial balance

There are mainly nine columns and five sections in an extended trial balance. Two columns for each section while the first column contains the lists of accounts in the TB. The format below explains this.

2.1 List of accounts

This shows all the accounts the entity has used to post one or more transactions. This list or chat of account includes items of assets, liabilities, capital, income and expenses.

2.2 TB balances

This shows the balances for the period under consideration in each of the accounts before adjustments are made.

2.3 Adjustments

This column contains the adjustments that are to be made in the accounts affected. In doing so, the accrual basis of accounting is applied.

2.4 Profit or loss

This column shows how the adjustment affects the income statement of the entity. Some adjustments will increase or reduce income and expenses.

2.5 Balance sheet

This column reflects how the adjustments impacted on the assets, liabilities, and capital of the business.

3. Importance of an extended trial balance

Generally, the significance of an extended trial balance is aiding the preparation of financial statements. With it, those statements can be prepared with ease and little human errors. Thereby, increasing accuracy of reporting. The other impact is on decision making. When financial reports are correct optimal decisions can be made by users of those statements.