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.
- Like all trial balances, the post-closing trial balance has the
job of verifying that the debit and credit totals are equal.
- If the debit and credit columns equal each other, it means the expenses equal the revenues.
- In other words, a post-closing trial balance only includes permanent accounts, such as assets, liabilities, and equity accounts, which are not closed at the end of the accounting period.
- After the closing entries have been made to close the temporary accounts, the report is called the post-closing trial balance.
- Remember that adding debits and credits is like adding positive and negative numbers.
A trial balance is an important step in the accounting process, because it helps identify any computational errors throughout the first three steps in the cycle. 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.
Tips for ensuring greater accuracy
Before that, it had a credit balance of 9,850 as seen in the adjusted trial balance above. Next, the accountant closes the temporary accounts by transferring their balances to the permanent accounts, such as retained earnings. This report provides a snapshot of the company’s financial position after the closing entries. This check might reveal a basic manual data entry mistake or entries made in the wrong column or account.
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. Post-closing trial balance – This is prepared after closing entries are made. Its purpose is to test the equality between debits and credits after closing entries are prepared and posted.
The post-closing trial balance for Printing Plus is shown in (Figure). The post-closing trial balance for Printing Plus is shown in Figure 5.8. There are three main types of trial balance reports that you can run, with each trial balance run during a specific part of the accounting cycle. Income Summary is then closed to the capital account as shown in the third closing entry.
Students often ask why they need to do all of these steps by hand in their introductory class, particularly if they are never going to be an accountant. If you have never followed the full process from beginning to end, you will never understand how one of your decisions can impact the final numbers that appear on your financial statements. You will not understand how your decisions can affect the outcome of your company. 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. The post-closing trial balance is also used to double-check that the only accounts with balances after the closing entries are permanent accounts.
This meant they would review statements to make sure they aligned with GAAP principles, assumptions, and concepts, among other things. 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. Now that we have completed the accounting cycle, let’s take a look at another way the adjusted trial balance assists users of information with financial decision-making.
Once your adjusting entries have been made, you’re ready to run your adjusted trial balance. Unadjusted trial balance – This is prepared after journalizing what is net income and how to calculate it transactions and posting them to the ledger. Its purpose is to test the equality between debits and credits after the recording phase.
This gross misreporting misled investors and led to the removal of Celadon Group from the New York Stock Exchange. Not only did this negatively impact Celadon Group’s stock price and lead to criminal investigations, but investors and lenders were left to wonder what might happen to their investment. Accounting software will generate a post-closing trial balance (or any other trial balance) with a click of the mouse.
Accounting software requires that all journal entries balance before it allows them to be posted to the general ledger, so it is essentially impossible to have an unbalanced trial balance. Thus, the post-closing trial balance is only useful if the accountant is manually preparing accounting information. For this reason, most procedures for closing the books do not include a step for printing and reviewing the post-closing trial balance. Since the debit and credit columns equal each other totaling a zero balance, we can move in the year-end financial statement preparation process and finish the accounting cycle for the period. As a result, temporary accounts do not have balances at the end of the accounting period and are not included in a post-closing trial balance.
For Printing Plus, the following is its January 2019 Income Statement. Note that for this step, we are considering our trial balance to be unadjusted. The unadjusted trial balance in this section includes accounts before they have been adjusted. As you see in step 6 of the accounting cycle, we create another trial balance that is adjusted (see The Adjustment Process). Once your adjusted trial balance has been completed, you’re ready to record post-closing entries for the month.
That is because they just started business this month and have no beginning retained earnings balance. The statement of retained earnings (which is often a component of the statement of stockholders’ equity) shows how the equity (or value) of the organization has changed over a period of time. The statement of retained earnings is prepared second to determine the ending retained earnings balance for the period.
The report also totals the debit and credit columns at the bottom. As with all financial accounting, the debits must equal the credits. If it’s out of balance, something is wrong and the bookkeeper must go through each account to see what got posted or recorded incorrectly.
Calculate the account balances for your ledger accounts
This type of trial balance contains the final balances in all company accounts, and you can use it to prepare your official financial statements. A trial balance includes all your business accounts that have credits or debits during a given reporting period. It includes the amounts credited or debited to each account, the dates of the reporting period, the account numbers, and the totals for all credits and debits entered during that time. In the Printing Plus case, the credit side is the higher figure at $10,240. This means revenues exceed expenses, thus giving the company a net income. If the debit column were larger, this would mean the expenses were larger than revenues, leading to a net loss.
What is the difference between a trial balance and a balance sheet?
The unadjusted trial balance is your first look at your debit and credit balances. If not, you’ll have to do some research to locate and correct any errors. The errors have been identified and corrected, but the closing entries still need to be made before this TB can used to create the financial statements. After the closing entries have been made to close the temporary accounts, the report is called the post-closing trial balance. Since temporary accounts are already closed at this point, the post-closing trial balance will not include income, expense, and withdrawal accounts.
What is the purpose of a post-closing trial balance?
This type of error can only be found by going through the trial balance sheet account by account. Not all accounts in the chart of accounts are included on the TB, however. Usually only active accounts with year-end balance are included in the TB because accounts with zero balances don’t make it on the financial statements. For example, if a company had a vehicle at the beginning of the year and sold it before year-end, the vehicle account would not show up on the year-end report because it’s not an active account. A trial balance sheet is a report that lists the ending balances of each account in the chart of accounts in balance sheet order.
An example of a post-closing trial balance
Since most companies have computerized accounting systems, they rarely manually create a TB or have to check for out-of-balance errors. Once you discover your error, repeat steps three through five to see whether your numbers now match. Again, this is simply a sum of all the debits of your accounts for that period. You’ll also need to close each balance to ensure that you focus on a specific time — usually, the duration of your accounting cycle, whether monthly or quarterly. For example, Celadon Group misreported revenues over the span of three years and elevated earnings during those years. The total overreported income was approximately $200–$250 million.