Based on the adjusted trial balance of Sky Blue Corporation at December 31, which of the following statements is correct?

• A. The adjusted trial balance is prepared after the financial statements.
• B. The adjusted trial balance only includes asset accounts.
• C. The adjusted trial balance excludes any adjusting entries.
• D. The total debits should equal the total credits.

Answer: (D)

Verified step by step guidance

1. Understand the purpose of the adjusted trial balance: It is prepared after all adjusting entries have been made to ensure that the total debits equal the total credits. This is a key step in the accounting cycle to verify the accuracy of the ledger accounts before preparing financial statements.
2. Clarify the role of adjusting entries: Adjusting entries are made to account for accrued revenues, accrued expenses, prepaid expenses, depreciation, and other items that ensure the financial statements reflect the true financial position of the company. These entries are included in the adjusted trial balance.
3. Recognize the scope of accounts in the adjusted trial balance: The adjusted trial balance includes all accounts—assets, liabilities, equity, revenues, and expenses—after adjustments have been made. It does not exclude any type of account.
4. Understand the sequence of preparation: The adjusted trial balance is prepared before the financial statements, not after. It serves as the basis for preparing the income statement, balance sheet, and statement of cash flows.
5. Verify the fundamental rule of trial balances: The adjusted trial balance must have total debits equal to total credits. This equality ensures that the accounting equation (Assets = Liabilities + Equity) is balanced and that the ledger accounts are correctly recorded.