Why an equal trial balance still needs adjustments

Alder's December 31 trial balance agrees, but two December events are missing. Alder completed $4,800 of design work that it has not billed. Its employees also earned $2,700 that Alder will pay in January. This lesson follows both events from the supporting evidence to the adjusting entry and later cash settlement.

Start with the reporting date

For each event, compare two amounts:

1. Determine the balance supported by the evidence at December 31.
2. Read the balance already recorded in the ledger.

The difference is the amount that still needs to be recorded. Completion reports and contracts support the revenue accrual. Approved timesheets and the payroll calendar support the wage accrual.

Work completed before billing or collection

Alder completed $4,800 of design service on December 30. Its right to payment is unconditional; sending the January 3 invoice is an administrative step. Alder expects to collect the cash on January 20. The December ledger contains no amount for this work.

The entry records December revenue and Alder's right to collect. When the client pays on January 20, Alder debits Cash and credits Accounts Receivable. The collection settles the receivable; Alder does not record the revenue again.

Employee work completed before payment

Alder's employees earned $2,700 in December. Alder will pay them on January 5. The December ledger contains no amount for these wages.

The entry records the employee service used in December and the obligation at December 31. On January 5, Alder debits Wages Payable and credits Cash. The payment settles the payable; it does not create another wage expense.

Connect the entries to the statements

The two adjustments add $4,800 of revenue and $2,700 of expense. December net income therefore increases by $2,100 ($4,800 − $2,700). Accounts Receivable increases by $4,800, Wages Payable increases by $2,700, and equity increases by $2,100 through net income.

The adjustments remain balanced, so the adjusted trial balance will also agree. Equal totals test whether total debits equal total credits. They do not test whether every event has been recorded in the correct period.

Adjustments and corrections have different purposes

A routine accrual can be necessary even when every daily transaction was recorded correctly. It records current-period activity that the normal billing or payment process has not yet captured. A correction repairs an error in an entry that was made or should already have been made. Both use journal entries, but the evidence and reason for each entry differ.

Check your understanding

A company completed $3,600 of unbilled service in December and used $1,200 of utilities that it will pay for in January. Assume the service was accepted, the payment right is unconditional, and neither event has been recorded. Prepare both December adjustments. Then determine the net effect on December income and identify the accounts that the January collection and payment will settle.

For more questions, use Chapter 2 practice: accruals.