5 2: Prepare a Post-Closing Trial Balance Business LibreTexts

The next step of the accounting cycle is to prepare the reversing entries for the beginning of the next accounting cycle. The following infographic and explanation will help you to have a better understanding of this Post-closing trial balance. Remember that closing entries are only used in systems using actual bound books made of paper.

How is the Post-Closing Trial Balance used in Financial Reporting?

The other two are the unadjusted and adjusted trial balances, both of which are prepared before the temporary accounts are closed out. As you continue reading below, we’ll cover post-closing trial balances in more detail, including key components and how they support accurate financial reporting. Temporary account balances are transferred to an intermediary account, often called the income summary account.

Contribution to Financial Statements Preparation

The trial balance and post-closing trial balance are both important financial statements used in accounting. The main difference between them is the timing of when they are prepared. The primary purpose of preparing this post-closing trial balance is to ensure that all accounts are balanced and ready for recording the next period of financial transactions.

• Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA).
• When all accountshave been recorded, total each column and verify the columns equaleach other.
• Closing entries are a fundamental aspect of the accounting cycle, transitioning financial records from one period to the next.
• In areal company, most of the mundane work is done by computers.Accounting software can perform such tasks as posting the journalentries recorded, preparing trial balances, and preparing financialstatements.
• 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 second).
• While it differs from an adjusted trial balance in purpose and content, both serve as crucial tools to ensure the accuracy of financial records and statements.

Overview of Included Accounts

For example, revenue accounts are closed to the income summary account, which is then closed to retained earnings. This ensures the income statement reflects only the revenues and expenses of the current period, providing an accurate view of profitability. The post-closing trial balance includes only permanent accounts—assets, liabilities, and equity—providing a clear picture of the company’s financial position without the influence of temporary accounts.

How does the post-closing trial balance relate to the balance sheet?

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. Closing entries also help businesses comply with tax regulations, such as those outlined in the Internal Revenue Code (IRC), by ensuring that reported taxable income is accurate. Resetting temporary accounts ensures that tax filings reflect the correct income and expenses, reducing the risk of penalties or audits. Journal entries used to transfer balances from temporary accounts to permanent accounts at the end of an accounting period. Post Closing Trial Balance is the list of all the balance sheet items and their balances, excluding the zero balance accounts.

This document establishes a clean starting point for the next accounting period, ensuring all accounts are balanced. It provides financial managers with a reliable framework for future planning and performance analysis, enhancing the integrity of financial reporting and supporting long-term stability. In contrast, permanent accounts, or real accounts, represent the ongoing financial position of a business.

The last step in the accounting cycle (not counting reversing entries) is to prepare a post-closing trial balance. They are prepared at different stages in the accounting cycle but have the same purpose – i.e. to test the equality between debits and credits. Closing entries reshape financial statements by transitioning temporary account balances. This process resets the income statement, ensuring it reflects only the revenues and expenses of the current period.

The post-closing trial balance closely resembles the balance sheet because it includes only permanent accounts, which are the same accounts listed on the balance sheet. Since all temporary accounts have been closed, the post-closing trial balance effectively serves as a snapshot of the company’s financial position at the end of the accounting period, similar to the balance sheet. The post-closing trial balance is a listing of all permanent accounts and their balances after closing entries have been journalized and posted. The difference between the unadjusted trial balance and the adjusted trial balance is the adjusting entries that are required to align the company accounts for the matching principle. As with the unadjusted and adjusted trial balances, both post closing trial balance the debit and credit columns are calculated at the bottom of a trial balance.

• Totals of both the debit and credit columns will be calculated at the bottom end of the post-closing trial balance.
• It’s vital for the adjusted trial balance, pre-closing trial balance, and post-closing trial balance.
• At this point, the accounting cycle is complete, and the companycan begin a new cycle in the next period.
• It is crucial in ensuring that the ledger is in balance and all temporary accounts have been closed.
• Closing entries prepare financial records for the next accounting period by transferring balances from temporary accounts—such as revenues, expenses, and dividends—to permanent accounts like retained earnings.
• Ending the cycle with a post-closing trial balance shows the earnings retention ratio clearly.
• Before that, it had a credit balance of 9,850 as seen in the adjusted trial balance above.

After closing out our temporary accounts, we make one more trial balance that shows our permanent accounts.

Essentially, it resembles a balance sheet and serves as the starting point for the next accounting period. Temporary accounts like revenues, expenses, and distributions have to be closed at the end of each accounting period to permanent accounts like assets, liabilities, and equity. The post closing trial balance lists all remaining accounts with balances after the closing entries have been posted to ensure that no temporary accounts still exist. A post-closing trial balance is a listing of all balance sheet accounts containing non-zero balances at the end of a reporting period. It is used to verify that the total of all debit balances equals the total of all credit balances, which should be net to zero.