POST CLOSING TRIAL BALANCE: Definition and Importance

post closing trial balance

A business must monitor its finances and keep track of debits and credits in order to be successful. This assists corporate stakeholders and owners in making strategic business decisions, which might range from expanding an area of the business to purchasing large equipment to improve productivity. A post-closing trial balance is one of many financial statements and sheets that a financial professional will prepare for the company. In this article, we will discuss a post-closing trial balance, its importance, as well as how to prepare it. We’ll also compare the post-closing trial balance vs the adjusted trial balance using an example.

What is a Post-Closing Trial Balance?

A post-closing trial balance is an inventory of all balance sheet accounts with non-zero balances at the end of a reporting period. It ensures that the sum of all debit and credit balances equals zero. These temporary accounts have already been closed and their balances moved into the retained earnings account as part of the closing process. As a result, this balance contains no revenue, expense, gain, loss, or summary account balances.

After ensuring that the sum of all debits and credits in the report is the same figure, the accountant will then set a flag to prevent more transactions from being recorded in the previous accounting period and begin recording accounting transactions for the next accounting period. This, then, is the final step in the period-end closing procedure.

If any revenue, expense, gain, loss, or summary account balances appear in the trial balance after the closing process, it is because they are related to the following accounting period.

The columns in this balance include the account number, account description, debit balance, as well as credit balance. Because few accounting computer systems use this designation, the header will most likely not include “Post Closing Trial Balance”. It will instead use the standard “Trial Balance” report header.

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.

What is the purpose of the post-closing trial 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. A net-zero post-closing trial balance therefore indicates that all temporary accounts are closed, the beginning balances are back at zero, and the next accounting period can begin.

If the debit and credit columns do not equal each other, you should go over your entries again because you may have missed transferring one to or from the ledgers correctly. After the unadjusted and adjusted trial balances, the post-closing trial balance is then the final step in the accounting cycle for a reporting period.

How to Prepare a Post-Closing Trial Balance

The final step in the accounting cycle (excluding reversing entries) is to prepare a post-closing trial balance. First of all, there are three types of trial balance. They are prepared at various stages of the accounting cycle but serve the same purpose, which is to test the equality of debits and credits.

Preparing the post-closing trial balance follows the same steps as preparing the unadjusted trial balance and adjusted trial balance. On the post-closing trial balance, only permanent account balances should appear. These amounts in post-closing T-accounts are transferred to the post-closing trial balance’s debit or credit column. When all accounts have been recorded, total each column and double-check that the columns match.

When preparing the balance, include a heading that includes the company’s name, the name of the balance sheet, and the accounting period’s closing date. The account title, debit totals, and credit amounts will appear beneath, with a total of the debit and credit columns at the bottom.

Post Closing Trial balance Format

A post-closing trial balance format is similar similarly to other trial balances in the accounting cycle, with three columns: a column for account names, a column for debits, and a column for credits. Because this trial balance contains solely balance sheet accounts, they appear in balance sheet order, beginning with assets, then liabilities, and finally equity.

The debit and credit columns, like the unadjusted and adjusted trial balances, are calculated at the bottom of a trial balance. The totals in both columns should be the same.

Example of Post Closing Trial Balance

XYZ Corporation

Trial Balance

July 12, 2021

AccountNumberAccountDescription
Debit

Credit
1000Cash$105,000 
1500Accounts receivable320,000 
2000Inventory500,000 
3000Fixed assets2,000,000 
3100Accumulated depreciation(480,000) 
4000Accounts payable $195,000
4500Accrued expenses 108,000
5000Retained earnings 642,000
5500Common stock 1,500,000
 Totals$2,445,000$2,445,000

Importance of Post Closing Trial Balance

To determine the amount of revenue and expenses for a certain time, you must begin the period with a zero balance in your revenue and expense accounts. The post-closing trial balance assists you in confirming that these accounts have no balances. It also ensures that after the closing entries, debits still equal credit amounts, ensuring that you begin the next accounting period with the correct amounts.

Post Closing Trial Balance vs Adjusted Trial Balance  

Before we compare these two, let’s define a trial balance.

What is a Trial Balance?

A trial balance is a document that lists all general ledger accounts. The company’s accounting systems generate these accounts. As previously stated, the general ledger accepts entries from the books of primary entry. It also separates those entries into different headings during the process. These headings duly correspond to accounts in financial systems. At the end of each financial period, companies close those accounts to reach their balances.

Those closing balances from the general ledger end up on the trial balance. This record typically includes the name of each general ledger account. Furthermore, it will disclose the balance on that account. The trial balance distinguishes between those balances based on whether the residual amount is debit or credit. It categorizes those amounts into two categories with the same names, debit, and credit.

The trial balance and the balance sheet are comparable. It gets its name from the various general ledger account balances. Furthermore, it ensures that the sum of the debit and credit balances at the end is equal. It is analogous to the balance sheet in certain ways. If the trial balance contains equal debit and credit sides, the balance sheet will then balance.

Overall, a trial balance is a record that aids in the preparation of financial statements. Businesses use it to accumulate general ledger balances. It categorizes those balances as debit or credit. Preparing the trial balance is usually the final step before reporting the financial statements. It also serves as a final check on the numbers that will appear on those statements. The trial balance, on the other hand, can take numerous forms, including adjusted and post-closing trial balances.

Types Of Trial Balance

#1. Unadjusted trial balance

This is prepared after journalizing and uploading transactions to the ledger. Its objective is to verify the equality of debits and credits following the recording phase.

#2. Adjusted trial balance

Prepared once adjusting entries have been made and posted. Its objective is to verify the equality of debits and credits following the preparation of adjusting entries. It also serves as the foundation for preparing financial statements.

An adjusted trial balance includes both nominal and real accounts. Nominal accounts are those found on the income statement, as well as withdrawals. The balance sheet contains real accounts.

Overall, the adjusted trial balance is a record of general ledger adjusted balances. It differs from the usual trial balance in that those adjustments are not included. Most businesses rely on these modifications to offer an accurate picture of their financial accounts. As previously stated, the adjusted amounts may pertain to multiple accounts. Companies can prepare the adjusted trial balance after making those adjustments.

#3. Post-closing trial balance

This is created after the closing entries have been made. Its goal is to verify the equality of debits and credits once closing entries have been produced and posted. Because all nominal accounts have been closed at this point, the post-closing trial balance only contains real accounts.

Post Closing Trial Balance vs Adjusted Trial Balance: The Difference

The adjusted and post-closing trial balances are two different versions of the same record. Both have various similarities in how they report general ledger balances. In addition, they have a similar format and follow the same principle. The adjusted trial balance also acts as a base for the post-closing trial balance. Nonetheless, they are different from each other.

The differences between the adjusted and post-closing trial balances include the following.

#1. Closing entries

After closing entries, the post-closing trial balance is prepared. These entries involve information transferred from temporary accounts to the profit and loss statement. Typically, this entails zeroing out the existing balances in the temporary accounts. Companies prepare them for usage in the upcoming accounting period by doing so. These closing entries are made once the adjustments in the adjusted trial balance have been made.

#2. Income and expenditure

The post-closing trial balance closure entries largely affect revenue and expense accounts. These accounts have balances in the adjusted trial balance. They do, however, only hold transient figures. Companies thus eliminate the payments with the post-closing trial balance. As previously stated, this occurs through closing entries.

#3. Retained Earnings 

The adjusted trial balance does not affect a company’s retained earnings. It has no effect on the retained earnings account because it separates the revenue and expense accounts. The post-closing trial balance, on the other hand, changes this account. As previously stated, it accomplishes this by shifting revenue and expenses to the retained earnings account. The post-closing trial balance also closes dividend accounts, which affects retained earnings.

In Conclusion,

The trial balance contains a list of closing general ledger balances. Typically, entering the balance into the financial statements require numerous processes. One version of this record is the adjusted balance. Companies prepare it after making general ledger account adjustments. Similarly, closing entries are used to adjust the trial balance. They will then receive the post-closing trial balance.

Frequently Asked Questions

Why is a post closing trial balance performed?

A post-closing is performed to verify the equality of debits and credits once closing entries have been produced and posted. Because all nominal accounts have been closed at this point, the post-closing trial balance only contains real accounts.

What is the difference between a trial balance and the post closing trial balance?

The retained earnings reported on the trial balance are the leftovers from the previous period, whereas the retained earnings reported on the post-closing trial balance contain the previous amount plus the retained earnings for the current period.

Which of the following would not be included in a post closing balance?

The revenue, expense, income summary, and owner’s drawing accounts will not be included on a post-closing trial balance since they have no balance after the accounting period has concluded.

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