Extended trial balance and statements - Preparing the extend...

Learning Outcomes

After reading this article, you will be able to explain the role and structure of the extended trial balance. You will learn how to prepare an extended trial balance, process year-end adjustments, correct errors using journals and suspense accounts, and use the extended trial balance as the final step before preparing financial statements. You will also understand common pitfalls and exam strategies for this topic.

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand the steps involved in preparing an extended trial balance and the transition from initial trial balance through to finalized accounts. In particular, revision should focus on:

• The purpose and structure of the initial trial balance
• Identification and correction of errors before finalizing the trial balance
• Procedures for making year-end adjustments (e.g. accruals, prepayments, depreciation, inventory)
• Use of journals and suspense accounts when correcting errors
• Preparation of the extended trial balance including adjusted balances
• Calculating final profit or loss ready for financial statement preparation

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which journal entry is required to adjust for a prepaid expense at year end?
   1. Debit Accruals, Credit Expense
   2. Debit Expense, Credit Prepayment
   3. Debit Prepayment, Credit Expense
   4. Debit Expense, Credit Accruals

2. True or false? A suspense account is used to record differences when the trial balance does not balance, until the error is found and corrected.

3. After posting year-end adjustments for closing inventory, which accounts are affected in the extended trial balance?

4. How does correcting an error that results in unequal debits and credits impact the extended trial balance?

Introduction

The extended trial balance is a key stage in the accounting process. It bridges the initial trial balance and the final preparation of financial statements. At this point, accounts are reviewed, year-end adjustments and error corrections are made, and adjusted balances are calculated. This ensures that all income and expenses are recorded in the correct period and that any mistakes are corrected before the financial statements are drafted.

Understanding how to prepare and use the extended trial balance is essential for ACCA FA2 exam success. This article focuses on its preparation, common adjustments, handling errors using journals and suspense accounts, and lays the foundations for financial statement preparation.

Key Term: trial balance
A memorandum statement listing the debit and credit balances from all general ledger accounts to check that total debits equal total credits.

Key Term: extended trial balance
An expanded trial balance that includes columns for original, adjustment, and adjusted balances, providing a structured approach for processing year-end adjustments prior to financial statement preparation.

Key Term: suspense account
A temporary account used to hold differences or unidentified amounts until the correct ledger destination is determined and errors are corrected.

Purpose of the Extended Trial Balance

The initial trial balance lists all balances from the ledger accounts. However, at year end, several additional steps are needed to ensure the accounts are accurate. The extended trial balance is used to record and summarise these year-end adjustments, preparing the adjusted balances required for the final accounts.

Adjustments include:

• Accruals and prepayments
• Depreciation of non-current assets
• Inventory valuation
• Irrecoverable debts and allowances for receivables
• Provisions

By using the extended trial balance, all adjustments are visible and traceable, and errors made during the year can be corrected before statements are prepared.

Structure of the Extended Trial Balance

The extended trial balance contains several columns for each account:

• Trial balance debit and credit columns (original balances)
• Journal adjustment debit and credit columns (year-end adjustments)
• Adjusted trial balance debit and credit columns (final balances after all corrections)

This structure ensures that all adjusting entries and their impact on final balances are clearly recorded.

Worked Example 1.1

A business extracts its initial trial balance as follows (simplified):

At year end, the following adjustments are required:

• Closing inventory: $10,200
• Insurance prepaid: $800 (already included in Prepayments)
• Accrued wages: $700

Question: How do you post these adjustments in the extended trial balance?

Answer:

• Enter the trial balance as the starting columns.
• In the 'Journal Adjustments' columns, post:
  • Credit Purchases, Debit Closing Inventory (inventory adjustment)
  • Debit Wages, Credit Accruals (wages accrued)
  • No new adjustment for insurance prepaid (already reflected).
• Add or subtract these adjustments in the adjusted balance columns.
• Confirm that total debits and credits match.

Making Adjustments in the Extended Trial Balance

Year-end adjustments ensure expenses and income are recorded in the correct period. Typical adjustments include:

• Accruals: Expenses due but unpaid are added as a liability and as an expense.
• Prepayments: Expenses paid in advance are removed from the current period and recorded as an asset.
• Depreciation: Allocates the cost of non-current assets over their useful life.
• Inventory: Closing inventory is removed from cost of sales and recorded as a current asset.
• Irrecoverable debts: Amounts known to be uncollectable are written off.
• Allowance for receivables: Provides for doubtful debts based on estimates.

Recording adjustments in journal form ensures that the extended trial balance reflects true and fair account balances.

Key Term: accruals
Expenses that have been incurred but not yet paid at the reporting date, recognised as a liability and an expense.

Key Term: prepayments
Amounts paid in advance for expenses not yet incurred, recorded as a current asset and reducing expense in the current period.

Worked Example 1.2

The following adjustment is required: At year end, electricity of $400 remains unpaid. The trial balance originally shows Electricity Expense $2,100.

How is this adjustment recorded in the extended trial balance?

Answer:

• Journal adjustment: Debit Electricity Expense $400, Credit Accruals $400.
• In the adjustment columns: Debit Electricity Expense, Credit Accruals.
• In the adjusted balance columns, Electricity Expense becomes $2,500, Accruals increases liability by $400.

Correction of Errors and the Suspense Account

Not all errors are detected by extracting the initial trial balance. Some errors result in an imbalance, causing the trial balance not to agree. In these cases, a suspense account is created to temporarily hold the discrepancy.

Common error types include:

• Omission: Missing transactions.
• Commission: Wrong account in correct category.
• Principle: Wrong type of account used.
• Original entry errors: Incorrect amount posted.
• Reversal: Debit and credit are switched.

To clear suspense account items, journal entries are posted to correct the error and remove the suspense account balance. All corrections must flow through the extended trial balance before the financial statements are prepared.

Worked Example 1.3

You discover that a payment of $600 for equipment repairs was posted only to the credit side of Bank and not to Repairs Expense.

What is the correcting entry, and how does it appear in the extended trial balance?

Answer:

• Journal: Debit Repairs Expense $600, Credit Suspense Account $600.
• In the adjustment columns: Debit Repairs Expense, Credit Suspense.
• The suspense account balance should then return to zero. The adjusted balances now correctly classify the expense.

Exam Warning

When an error affects both income statement and statement of financial position accounts, always check both sides of the adjustment and ensure suspense account balances do not remain after corrections.

From Extended Trial Balance to Financial Statements

Once all adjustments and corrections have been posted, the adjusted columns provide the final balances for each account. These are used to prepare the statement of profit or loss (income statement) and the statement of financial position.

The extended trial balance ensures that only post-adjustment figures enter the financial statements, supporting accuracy and compliance.

Revision Tip

Always check that the debits and credits in all columns of the extended trial balance are equal after adjustments. Any imbalance indicates an error remains.

Summary

The extended trial balance is a structured tool to process both adjustments and corrections before final accounts are drawn up. By carefully recording each adjustment, posting error corrections, and ensuring balanced totals, you reduce the risk of misstated profits or misclassified assets and liabilities. This is an exam-critical skill and a practical necessity in real-world accounting.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify the purpose and structure of the extended trial balance
• Explain how to process year-end adjustments (accruals, prepayments, depreciation, inventory)
• Record adjusting and correcting entries in journal form
• Understand the function and clearing of the suspense account
• Prepare adjusted trial balance columns ready for statement preparation
• Recognise common exam pitfalls with error correction and adjustments

Key Terms and Concepts

• trial balance
• extended trial balance
• suspense account
• accruals
• prepayments