In financial accounting, the statements prepared at the end of an accounting cycle are the final reports. Companies use this information to assess profitability, net worth and cash flows, among other things. The preparation of financial statements is also part of the accounting cycle. The statements use information directly from the adjusted trial balance.
The trial balance contains all accounts and ending balances from a company’s general ledger. The unadjusted trial balance is the first level of this report. Accountants prepare the report to ensure it meets the accounting equation, assets equal liabilities plus owner’s equity. The adjusted trial balance includes all adjusting entries that update temporary accounts for accruals and deferrals.
Many different steps are necessary to complete prior to preparing financial statements. One important step — accomplished with the trial balance report — is matching revenues with expenses. All companies must have specific time periods for which they record financial information. Matching revenues and expenses ensures all capital spent during a period directly relate to the revenues a company reports for the same period.
Financial statements include specific information taken directly from the adjusted trial balance. Revenues, cost of goods sold and expenses reside on the income statement. Assets, liabilities and owner’s equity accounts go on the balance sheet. The account balances listed on the adjusted trial balance are the amounts that go on each line for the respective accounts.
In some cases, the first financial statements prepared by accountants are not final. These statements are purely for analytical purposes so owners and executives can review the information for any questionable items or improprieties. If adjustments are necessary, accountants will update the accounts and prepare new financial statements. A second adjusted trial balance will often be the source for updated accounts.