The extended trial balance works in very much the same way as the trial balance except that there are a few adjustments to make after which you can then separate out the entries that belong to the balance sheet and which belong to the income statement.
The extended trial balance is used for making adjustments to the accounts at the end of an accounting period. The reason for this is because of the matching principle of accounting, where revenues are matched with expenses in the accounting period in which they were incurred; adjusting entries need to be made.
These adjusting entries account for such things as expenses that have been incurred but not yet paid, revenues that have been earned but not yet recorded, and depreciation on equipment.
Using the extended trial balance also ensures that the full double entry method is used correctly to each adjustment without having the wait for the adjustments to be written into the ledger.
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