Post closing trial balance

A post-closing (or after-closing) trial balance includes the balances of permanent accounts which are carried forward to the next accounting period. As for the aim of such trial balance, it is to demonstrate balances’ equality. The accounts which constitute a post-closing trial balance are called permanent accounts, balance sheet accounts or real accounts .

After recording and posting the closing entries, the permanent accounts should be equal. The reason why the post-closing trial balance comprises only of permanent balance sheet accounts (such as assets, liabilities and equity/owner's capital) is that all temporary accounts should have zero balances .

The goal of the post-closing trial balance is to examine whether the ledger at the beginning of the next accounting period is in balance. The content of the post-closing trial balance i.e. the accounts and figures should accurately match the amounts presented on the end-of-a-period balance sheet .

Accounting cycle

The whole process of analyzing, journalizing transactions and finally, preparing post-closing trial balance is termed as the accounting cycle.

The following stages can be distinguished during the cycle :

1. analysis and recording of transactions in the journal
2. posting transactions to the ledger
3. preparation of an unadjusted trial balance
4. assembly and analysis of adjustment data
5. preparation of an optional end-of-period spreadsheet
6. journalizing and posting adjusting entries to the ledger
7. preparation of an adjusted trial balance
8. preparation of financial statements
9. journalizing and posting closing entries to the ledger
10. preparation of a post-closing trial balance

After posting the closing entries, in order to finalize the closing process, all the temporary accounts (like income summary, revenue, expense and drawing) are double-underlined .

The steps in the cycle are performed respectively and repeated in each accounting period .

The purpose of a post-closing trial balance

The main aim of preparing a post-closing trial balance is to verify whether the company has journalized and posted all closing entries correctly. Furthermore, it also proves the balance of the accounting equation at the end of the accounting period (debit side equals credit side). Yet, it cannot be assumed that the company has posted all transactions and the ledger has been completed. Even if a transaction has not been posted or has been posted twice, still the post-closing balance will remain in balance. Consequently, the ledger would not be entirely correct .

What needs to be underlined is that total debits in an after-closing trial balance will not be equal to total assets on the balance sheet. Such a situation occurs because accumulated depreciation is deducted from assets on the balance sheet, however, it is added to the total credits in a post-closing trial balance .

Examples of Post closing trial balance

• The post-closing trial balance includes the balances of the permanent accounts such as cash, accounts receivable, inventory, fixed assets, intangible assets, accounts payable, loans payable, and equity accounts.
• For example, if a company has a cash balance of $20,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has accounts receivable of $10,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has inventory of $30,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has fixed assets of $60,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has intangible assets of $15,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has accounts payable of $5,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• Another example is if a company has loans payable of $25,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.
• And finally, if a company has equity accounts of $50,000 at the end of the accounting period, this balance will be carried over to the post-closing trial balance.

Advantages of Post closing trial balance

A post-closing trial balance offers several advantages. These include:

• Ensuring accuracy of the financial statements - the post-closing trial balance serves as the basis for the next accounting period and helps to prevent errors from being carried forward.
• Determining the net income and net loss for the period - the post-closing trial balance shows the net income and net loss for the period.
• Demonstrating the equality of debits and credits - the post-closing trial balance shows the equality of debits and credits, which is important for the accuracy of the accounts.
• Ensuring that all transactions have been recorded - the post-closing trial balance ensures that all transactions have been properly recorded.
• Identifying any unrecorded transactions - the post-closing trial balance helps to identify any unrecorded transactions and ensure that they are properly recorded.

Limitations of Post closing trial balance

A post-closing trial balance is a useful tool that helps to demonstrate the equality of the balances in permanent accounts. However, it has certain limitations, including:

• It does not include temporary accounts, such as revenue and expense accounts, which are closed at the end of the accounting period.
• It does not include any adjustments, such as depreciation, which are necessary to be made in order to accurately reflect the financial position.
• It does not provide any information about the nature of the accounts or the transactions taking place.
• It does not provide any insight into the overall financial condition of the organization.

Other approaches related to Post closing trial balance

Apart from post-closing trial balance, there are other approaches which help in demonstrating balances’ equality.

• Adjusted trial balance: It is a listing of all accounts with their adjusted balances. It is prepared after making all adjustments necessary to ensure that all transactions have been recorded and accounted for.
• Closing entries: It is a journal entry made at the end of an accounting period to transfer the balance of all temporary accounts to the permanent account, Retained Earnings.
• Reversing entries: It is a journal entry which is made to reverse a prior period adjusting entry and to reset the balance of an account back to its original amount.
• Comparative trial balance: It is a listing of all accounts with their balances on two or more different dates. It is used to compare the balances of various accounts over time.

In conclusion, post-closing trial balance is just one of the approaches that can be used to demonstrate balances’ equality. Other approaches include adjusted trial balance, closing entries, reversing entries, and comparative trial balance.

Footnotes

Post closing trial balance — recommended articles

Closing the accounts — Closing entries — Book of original entry — Opening entries — Income summary account — Closing balance — Income summary — T account — Reversing entry

References

• Gilbertson C.B., Lehman M.W., Gentene D. (2013), Century 21 Accounting: Multicolumn Journal, Introductory Course, Chapters 1-17, Cengage Learning, Mason, p. 227
• Kieso D.E., Weygandt J.J., Warfield T.D. (2010), Intermediate Accounting: IFRS Edition, John Wiley & Sons, Hoboken, pp. 81, 106
• Nobles T.L., Scott C.J., McQuaig D.J., Bille P.A. (2012), College Accounting, Cengage Learning, Mason, pp. 205, 211
• Scott C.J (2017), College Accounting: A Career Approach, Cengage Learning, Boston
• Warren C.S., Reeve J.M., Duchac J. (2011), Accounting, Chapters 1-13, Cengage Learning, Mason, p. 159
• Weygandt J.J., Kieso D.E., DeFranco A.L., Kimmel P.D. (2005), Hospitality Financial Accounting, John Wiley & Sons, Hoboken, p. 155
• Weygandt J.J., Kimmel P.D., Kieso D.E. (2009), Financial Accounting, John Wiley & Sons, Hoboken, pp. 161-164
• Weygandt J.J., Kimmel P.D., Kieso D.E. (2010), Problem Solving Survival Guide t/a Financial Accounting, John Wiley & Sons, Hoboken, Chapter 4, 4-13
• Weygandt J.J., Kimmel P.D., Kieso D.E. (2018), Accounting Principles, John Wiley & Sons, Hoboken, pp. 4-16, 4-17

Author: Paulina Zachara