Question

1. Explain how an unadjusted trial balance differs from an adjusted trial balance.
2. Explain the difference between a classified Balance Sheet and an unclassified Balance Sheet.
3. Explain the purpose of an Income Summary account and what does its balance reflect after revenue accounts and expenses accounts have been closed out.

Answer 1

A. Unadjusted trial balance is the compilation of the closing balance in the ledger accounts. All the closing balances in ledger are listed in the order and then trial balance is prepared before doing any year-end adjustments

Adjusted trial balance is taken after year-end adjustment entries are adjusted. It involves passing entries for year-end adjustments like outstanding, prepaid, Depreciation, inventory adjustments, etc. Adjusted trial balance has 2 columns to make adjustments for unadjusted trial balance. Also adjusted trial balance is used in drawing up Income statement and Balance sheet

B. Classified Balance Sheet

A classified Balance sheet lists Assets and Liabilities /Stockholders’ under different headings and is a systematic way of showing Assets and Liabilities plus stockholders equity. It shows subtotals for each category and helps in understanding the financial statements in a better way

Assets compose of

• Current Assets
• Non Current Assets
• Long term investments
• Fixed Assets – (Gross – Accumulated depreciation) = Net assets
• Intangibles - (Gross – Accumulated amortization) = Net Intangibles

Liabilities and Stockholders’ equity

• Current Liabilities
• Non Current Liabilities
• Long term liabilities
• Stockholders’ equity

Unclassified Balance sheet does not contain above way of classifying assets and liabilities and presentation in the balance sheet. It just lists all assets and liabilities in an order.

C. Income summary account is an account which is used in closing the period end for all the accounts of Income statement that is expense account and revenue account. It involves transferring balance of Expense and Revenue account to Income summary account.

The net amount after closing revenue and expense account represents the net income or loss for the period closed. It is transferred to Retained Earnings Account