4. Adjusting the Initial Trial Balance

Question 1

Why does the initial trial balance need to be adjusted for closing inventory?

Answer 1

In a manual accounting system, the adjustment for closing inventory is often not accounted for until after the initial trial balance has been extracted.
Therefore, opening inventory and purchases appear on the initial trial balance.
The initial trial balance needs to be adjusted to reflect that the business no longer has opening inventories (these have been sold in the year) and instead has closing inventories (which are carried forward as current assets to be sold in the following year) and that purchases have transferred to cost of sales.

Question 2

What is the approach to adjusting the initial trial balance for closing inventories? (2)

Answer 2

1. Calculate the value of closing inventories
2. Prepare the year-end journals for opening inventories, purchases and closing inventories and enter the journals as adjustment to the initial TB.