How To Prepare A Post Closing Trial Balance

Both the debits and credits totals are calculated at the end, and if these are not equal, one can know that there must have been some mistake in preparing the trial balance. All businesses have adjusting entries that they’ll need to make before closing the accounting period. These adjusting entries include depreciation expenses, prepaid expenses, insurance expenses, and accumulated depreciation.

You achieve this by tallying the debit column with the credit column of your company’s trial balance. In case these columns do not match, it means there exists an accounting error. Thus, your business management can undertake comparative analysis and peer analysis with the help of the trial balance sheet. Such an analysis helps your management to understand the business trends and accordingly take the necessary actions. These decisions may be regarding your manufacturing costs, business expenses, incomes, etc.

The Entries For Closing A Revenue Account In A Perpetual Inventory System

For instance, you may commit an error of principle if you incorrectly classify an expenditure or a receipt between capital and revenue accounts. Committing such an error would certainly impact your financial statements. That is, such an error would lead you to understate or overstate income, assets, liabilities, etc.

You can easily make adjustments to your accounts in case there are any errors. It is so amazing how simplistic you’ve made understanding accounting for me. You’ve made me a to-listen-to while I’m conversating in the midst of financial accountants. The third entry requires Income Summary to close to the Retained Earnings account. Preparing financial statements requires preparing an adjusted trial balance, translating it into financial reports, and auditing them. Get help with preparing closing entries and post-closing trial balance, accounting templates, and much more! The company decided to distribute to its shareholders’ dividends on the amount of $1,200, so the Retained Earnings raised by $16,100.

What Does The General Ledger Have To Do With A Trial Balance?

A net-zero post-closing trial balance indicates that all temporary accounts are closed, the beginning balances are back at zero and the next accounting period can begin. A trial balance sheet includes a list of general ledger accounts along with their ending debit or credit balances. Furthermore, a trial balance also includes the account number of each of the general ledger accounts. In addition to this, your trial balance sheet also showcases the name of your entity in the title and the date of the financial period for which such a statement is prepared. It is important for your business to prepare the trial balance sheet. This is because a correct trial balance statement helps you in preparing basic financial statements including the income statement and the balance sheet. Thus, there is no need for you to go through each of the ledger accounts while preparing financial statements.

Preparing the adjusted trial balance requires “closing” the book and making the necessary adjusting entries to align the financial records with the true financial activity of the business. An account’s normal balance will be the side on which increases are recorded.

What Is The Purpose Of The Post

The total dollar amount of the debits and credits in each accounting entry are supposed to match. No temporary accounts—revenues, expenses, or dividends—are included because they have been closed. The accounts in the ledger are now up to date and ready for the next period’s transactions. Another peculiar thing about Bob’s post-closing trial balance is that normally a retained earnings account will have a credit balance, but in Bob’s books it has a debit balance. The reason is that Bob did not make a profit in the first month of his operations. The post-closing trial balance will reflect the final balances for the company accounts at the end of the financial reporting period. These ending balances will become opening balances for the next accounting period.

It is also necessary to demonstrate that the accounting equation is in balance at the end of the accounting period. When the post-closing trial balance is prepared, the accounting cycle of an accounting period is over.

When Do I Record My Post Closing Balance?

Used to make sure that beginning balances are correct, the post-closing trial balance is also used to ensure that debits and credits remain in balance after closing entries have been completed. Such a summary helps you to locate journal entries in the original books of accounts. For instance, your company’s trial balance sheet provides an audit trail to the auditors. This helps them to carry out the audit of your financial statements. They are thus able to provide their comments with regards to the financial statements so prepared in the audit report. A trial balance sheet showcases the balances of various ledger accounts.

There are three types of trial balance – Post-closing, Unadjusted, and Adjusted Trial Balance. At this point, the accounting cycle is complete, and the company can begin a new cycle in the next period. In essence, the company’s business is always in operation, while the accounting cycle utilizes the cutoff of month-end to provide financial information to assist and review the operations. The post-closing trial balance for Printing Plus is shown in Figure 1.32. The next step of the accounting cycle is to prepare the reversing entries for the beginning of the next accounting cycle.

Why Is It Necessary To Complete An Adjusted Trial Balance?

This trial balance, which should contain only balance sheet accounts, will help guarantee that your books are in balance for the beginning of the new accounting period. Trial Balance The trial balance is a worksheet on which you list all your general ledger accounts and their debit or credit balance. If they don’t equal, you know you have an error that must be tracked down. Besides this, it also shows the adjustment entries in case there are any. Further, your trial reveals the unadjusted and adjusted balances of various ledger accounts. You need to make adjustment entries in case of any accounting errors, as stated above. Remember, your general ledger accounts are recorded in the following order in your trial balance sheet.

Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption. Accountants in the company prepare the unadjusted trial balance after entries are made in journal and ledger.

The last step of the accounting cycle is the post-closing trial balance. This trial balance is prepared post closing trial balance at the end of each accounting period and forwarded to the opening balance of the next period.

Like all trial balances, the post-closing trial balance has the job of verifying that the debit and credit totals are equal. The post-closing trial balance has one additional job that the other trial balances do not have.

All the temporary accounts like revenue and expense accounts have been closed out into the retained earnings account via the income summary account . Permanent accounts are accounts that once opened will always be a part of a company’s chart of accounts. Revenue, expenses and dividends do not show up on the post-closing trial balance because they are considered temporary accounts. Temporary accounts are accounts whose balances are zeroed out at the end of each accounting period. When a new accounting period opens, these accounts are used again and will accrue balances until the accounting period comes to an end. At that time, the accounts will be closed to permanent accounts and once again have a zero balance. The purpose of the post-closing trial balance is to ensure the total of all debits and credits equal each other to result in a net of zero.

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. That way, you are prepared to enter accurate information into the financial statements. The post-closing trial balance ensures there are no temporary accounts remaining the purpose of the post-closing trial balance is open and all debit balance is equal to all credit balances. Also, it determines if there are any balances in the permanent accounts after passing the closing entries. As closing entries close all the temporary ledger accounts, the trial balance (post-closing) includes permanent ledger accounts, or we can say balance sheet accounts.

A post-closing trial balance is a list of balance sheet accounts with non-zero balances at the end of the reporting period. They all have the same purpose (i.e. to test the equality between debits and credits) although they are prepared at different stages in the accounting cycle. Since temporary accounts are already closed at this point, the post-closing trial balance will not include income, expense, and withdrawal accounts. Because you made closing entries for revenue and expenses, those accounts do not appear on the post-closing trial balance.

• Because of this, you won’t see any revenue or loss details, or a summary account balance on the post-closing trial balance sheet.
• It’s important that your trial balance and all debit balances and all credit balances in your general ledger are the same.
• A listing of all of the accounts in the general ledger with account balances after the closing entries have been posted.
• In such a case, you must record such an account as nil or zero in your trial balance sheet.
• However, all the other accounts having non-negative balances are listed including the retained earnings account.

A Post-closing Trial Balance lists all the balance sheet accounts that have a non-zero balance at the end of a reporting period. Hence, Companies use this tool to ensure that all debit balances are equal to the total of all credit balances after an accountant passes closing entries. This post-closing trial balance helps in checking the accuracy of permanent ledger account balance. It is important to do this checking because so many new postings go to the ledger account from the adjusting entries and closing entries. 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.

Post Closing Trial Balance

Completed after closing entries, the post-closing trial balance prepares your accounts for the next period. Further, the short-term liabilities appear before the long-term liabilities under the head ‘Liabilities’ in your trial balance. Also, the balances pertaining to assets and expenses are represented in the debit column. Whereas the balances related to liabilities, income, and equity are shown in the credit column.

Do I Need To Run Three Trial Balance Reports?

Generally, this should include the name of the company, the type of trial balance, and the date of the report. This balance sheet will help ensure that a company’s beginning balances are correct for the next accounting cycle. There can be several reasons why your debits and credits don’t match. Yes, to complete the accounting cycle, you’ll need to run three trial balance reports. Thus, you must treat the amount spent on any addition made to the land and building as a capital expenditure. However, you may wrongly treat it as a revenue expense if you debit the maintenance and repairs account with such an amount. It gives you a snapshot of the accounting transactions of your business to the accountants and auditors.