This meant they would review statements to make sure they aligned with GAAP principles, assumptions, and concepts, among other things. The post-closing trial balance for Printing Plus is shown in Figure 5.8. Income Summary is then closed to the capital account as shown in the third closing entry. Both US-based companies and those headquartered in other countries produce the same primary financial statements—Income Statement, Balance Sheet, and Statement of Cash Flows. Concepts Statements give the Financial Accounting Standards Board (FASB) a guide to creating accounting principles and consider the limitations of financial statement reporting. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .
The unadjusted trial balance is the first trial balance that you’ll prepare, and it should be completed after all entries for the accounting period have been completed. The trial balance worksheet contains columns for both income statement and balance sheet entries, allowing you to easily combine multiple entries into a single amount. This makes sure that your beginning balances for the next accounting cycle are accurate. A post-closing trial balance is, as the term suggests, prepared after closing entries are recorded and posted. It is the third (and last) trial balance prepared in the accounting cycle.
The balance sheet is classifying the accounts by type of accounts, assets and contra assets, liabilities, and equity. Even though they are the same numbers in the accounts, the totals on the worksheet and the totals on the balance sheet will be different because of the different presentation methods. You may notice that dividends are included in our 10-column worksheet balance sheet columns even though this account is not included on a balance sheet. There is actually a very good reason we put dividends in the balance sheet columns.
The Post-Closing Trial Balance
To get that balance, you take the beginning retained earnings balance + net income – dividends. If you look at the worksheet for Printing Plus, you will notice there is no retained earnings account. That is because they just started business this month and have no beginning retained earnings balance.
In the first and second closing entries, the balances of Service Revenue and the various expense accounts were actually transferred to Income Summary, which is a temporary account. The Income Summary account would have a credit balance of 1,060 (9,850 credit in the first entry and 8,790 debit in the income tax return second). Nominal accounts are those that are found in the income statement, and withdrawals. In Completing the Accounting Cycle, we continue our discussion of the accounting cycle, completing the last steps of journalizing and posting closing entries and preparing a post-closing trial balance.
- Enron defrauded thousands by intentionally inflating revenues that did not exist.
- The post-closing trial balance contains real accounts only since all nominal accounts have already been closed at this stage.
- This meant they would review statements to make sure they aligned with GAAP principles, assumptions, and concepts, among other things.
- The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period.
The post-closing trial balance is the last step in the accounting cycle. It is prepared after all of that period’s business transactions have been posted to the General Ledger via journal entries. The post-closing trial balance can only be prepared after each closing entry has been posted to the General Ledger. The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account. After the closing entries are posted, these temporary accounts will have a zero balance.
It is worth mentioning that there is one step in the process
that a company may or may not include, step 10, reversing entries. Reversing entries reverse an adjusting entry made in a prior period
at the start of a new period. We do not cover reversing entries in
this chapter, but you might approach the subject in future
accounting courses. Each month, you prepare a trial balance showing your company’s position. After preparing your trial balance this month, you discover that it does not balance.
6 Prepare a Trial Balance
If there are any temporary
accounts on this trial balance, you would know that there was an
error in the closing process. As with the unadjusted and adjusted trial balances, both the debit and credit columns are calculated at the bottom of a trial balance. If these columns aren’t equal, the trial balance was prepared incorrectly or the closing entries weren’t transferred to the ledger accounts accurately.
Error
Notice that this trial balance looks almost exactly like the Paul’s balance sheet except in trial balance format. This is because only balance sheet accounts are have balances after closing entries have been made. Once your adjusted trial balance has been completed, you’re ready to record post-closing entries for the month. Since there are several types of errors that trial balances fail to uncover, each closing entry must be journalized and posted carefully. And finally, in the fourth entry the drawing account is closed to the capital account.
Once all accounts have balances in the adjusted trial balance columns, add the debits and credits to make sure they are equal. If you check the adjusted trial balance for Printing Plus, you will see the same equal balance is present. After the unadjusted trial balance is prepared and it appears error-free, a company might look at its financial statements to get an idea of the company’s position before adjustments are made to certain accounts. A more complete picture of company position develops after adjustments occur, and an adjusted trial balance has been prepared. These next steps in the accounting cycle are covered in The Adjustment Process. Once all balances are transferred to the unadjusted trial balance, we will sum each of the debit and credit columns.
2 Prepare a Post-Closing Trial Balance
The process of preparing the post-closing trial balance is the same as you have done when preparing the unadjusted trial balance and adjusted trial balance. Only permanent account balances should appear on the post-closing trial balance. These balances in post-closing T-accounts are transferred over to either the debit or credit column on the post-closing trial balance. When all accounts have been recorded, total each column and verify the columns equal each other. The process of preparing the post-closing trial balance is the
same as you have done when preparing the unadjusted trial balance
and adjusted trial balance.
Since this is the first month of business for Printing Plus, there is no beginning retained earnings balance. Notice the net income of $4,665 from the income statement is carried over to the statement of retained earnings. Dividends are taken away from the sum of beginning retained earnings and net income to get the ending retained earnings balance of $4,565 for January. This ending retained earnings balance is transferred to the balance sheet. All temporary
accounts with zero balances were left out of this statement. Unlike
previous trial balances, the retained earnings figure is included,
which was obtained through the closing process.
What is the Post Closing Trial Balance?
After the closing entries are journalized and posted, only permanent, balance sheet accounts remain open. A post‐closing trial balance is prepared to check the clerical accuracy of the closing entries and to prove that the accounting equation is in balance before the next accounting period begins. The purpose of closing entries is to close all temporary accounts and adjust the balances of real accounts such as owner’s capital. Like all of your trial balances, the post-closing balance of debits and credits must match. Adjusted trial balance – This is prepared after adjusting entries are made and posted.
There is a worksheet approach a company may use to make sure end-of-period adjustments translate to the correct financial statements. If you like quizzes, crossword puzzles, fill-in-the-blank,
matching exercise, and word scrambles to help you learn the
material in this course, go to My
Accounting Course for more. One way to find the error is to take the difference between the two totals and divide the difference by two.
The debit and credit columns both total $34,000, which means they are equal and in balance. However, just because the column totals are equal and in balance, we are still not guaranteed that a mistake is not present. Your stockholders, creditors, and other outside professionals will use your financial statements to evaluate your performance. If you evaluate your numbers as often as monthly, you will be able to identify your strengths and weaknesses before any outsiders see them and make any necessary changes to your plan in the following month. All temporary accounts with zero balances were left out of this statement.
Running a trial balance is a must for anyone manually recording financial transactions since it helps to make sure that debits and credits are in balance — which is the core principle of double-entry accounting. While all of the adjusting entries for ABC Business are reflected in the adjusted trial balance, we still need to do some closing entries before running the post-closing trial balance. Presentation differences are most noticeable between the two forms of GAAP in the Balance Sheet. Under US GAAP there is no specific requirement on how accounts should be presented.
As with all financial reports, trial balances are always prepared with a heading. Typically, the heading consists of three lines containing the company name, name of the trial balance, and date of the reporting period. A post-closing trial balance is a report that is run to verify that all temporary accounts have been closed and their beginning balance reset to zero.
