Post-Closing Trial Balance: Definition, Purpose, and Preparation

For this reason, most procedures for closing the books do not include a step for printing and reviewing the post-closing trial balance. By verifying that debits and credits are equal to one another, accountants can conclude that the closing process was completed accurately, and the company will start the new period with clean books. We saw that there was the dividends entry and then the entries related to net income, right?

Again, this means that all temporary accounts have been closed out, and the company has fresh books to begin tracking revenues and expenses in the new period. Nominal accounts are those that are found in the income statement, and withdrawals. After transferring balances to the income summary, the final step is closing this account to retained earnings.

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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. When accountants “close” the books at the end of the month, quarter, or year, they’ll zero out temporary accounts, like revenues and expenses, and move their balances to retained earnings. In contrast, permanent accounts, or real accounts, represent the ongoing financial position of a business. These accounts—assets, liabilities, and equity—retain their balances across accounting cycles and reflect the company’s long-term financial health. Accurate permanent accounts are essential for historical analysis and informed decision-making. Learn how closing entries streamline accounting by resetting temporary accounts and ensuring accurate financial statements.

Why are temporary accounts not included in the post-closing trial balance?

The equity is calculated by subtracting the liabilities total from the assets total. These include accounts receivable, inventory, cash, investments, vehicles, furnishings, and other assets. There are three types of trial balances companies will prepare during the accounting cycle, including the post-closing version.

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This step consolidates the period’s net income or loss into the equity section. For example, if the income summary reflects a net income of $20,000, this amount is credited to retained earnings, increasing shareholders’ equity. 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.

Types of Trial Balances

• As you can see, the accounts are generally listed in balance sheet order starting with the assets followed by the liabilities and then equity accounts.
• As part of the closing process, the balances in these movements to the retained earnings account.
• This process resets the temporary accounts to zero and prepares them for the next accounting period.
• This is because only balance sheet accounts are have balances after closing entries have been made.
• The post-closing trial balance is just a list of the remaining accounts.
• After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
• Additionally, the post-closing trial balance will have a retained earnings account which contains the balances of all temporary accounts that have been closed out.

The post-closing trial balance ends with totals for both credits and debits at the bottom of the sheet. When all assets, liabilities, and equity have been accounted for, the credit and debit totals should be post closing trial balance equal. Either the sheet was prepared incorrectly, or all the line items were not properly accounted for.

• Students often ask why they need to do all of thesesteps by hand in their introductory class, particularly if they arenever going to be an accountant.
• Only permanent account balances shouldappear on the post-closing trial balance.
• These balances inpost-closing T-accounts are transferred over to either the debit orcredit column on the post-closing trial balance.
• The last step of the accounting cycle is the post-closing trial balance.
• The post-closing trial balance contains real accounts only since all nominal accounts have already been closed at this stage.
• This makes sense because all of the income statement accounts have been closed and no longer have a current balance.

It contains columns for the account number, description, debits, and credits for any business or firm. Various accounting software makes it mandatory that all journal entries must be balanced before allowing them to be posted to the general ledger. Also, it determines whether any balances are remaining in the permanent accounts after closing entries have been journalized. Since these are determined to be temporary accounts, it contains no sales revenue entries, expense journal entries, no gain or loss entries, etc. As part of the closing process, the balances in these movements to the retained earnings account. Post-Closing Trial Balance is an accuracy check to verify that all debit balances equal all credit balances, and hence net balance should be zero.

It helps to identify any errors or omissions and provides a starting point for the next accounting period. The main difference between the post-closing trial balance and the adjusted trial balance is that this statement contains the income statement accounts like revenues, expenses, and other gain or lost accounts. In the last step of the accounting cycle, the accountant requires to prepare the post-closing trial balance. This statement is prepared after the accountant makes all necessary adjustments to the general ledger and the adjusted trial balance, and all the suspended accounts are closed.