When preparing financial statements, a trial balance is used as part of the closing process to develop the balance sheet, income statement and statement of cash flows. After an adjusted trial balance is prepared, a post closing trial balance is used to verify the accuracy of the closing process. This type of trial balance is helpful when ensuring the completeness of financial statements derived from all of the accounting transactions.
Definition
A post closing trial balance is comprised of permanent accounts and is produced after adjusting entries are posted, and the adjusted trial balance is prepared. A trial balance is a listing of accounts from the general ledger and is typically displayed with two columns – one for debits and one for credits. The trial balance should have a net balance of zero, and the debits should equal the credits. The post closing trial balance is part of the bookkeeping process involving financial transactions and is reviewed when manually preparing financial statements. In automated systems such as those using accounting software, post closing entries may not be reviewed by accountants.
Purpose
This type of trial balance is important for verification. It ensures that closing was performed correctly and that all the temporary accounts were reduced to zero, by closing entries. When manually creating financial statements in Excel, a post closing trial balance is an effective tool. Given that most general ledger systems are automated, these types of trial balances are not as prevalent in accounting departments, as they once were.
Accounts
As previously stated, only permanent accounts should be listed on this type of trial balance. If any income statement accounts still hold account totals or a balance, or if the income summary account is still listed with an amount, the closing process didn’t go as intended. It is important to review the accounts and troubleshoot any errors in the closing process once identified.
Types of accounts included on a post closing trial balance:
- Cash and Cash Equivalents
- Accounts Receivable
- Accounts Payable
- Notes Receivable
- Notes Payable
Preparation
The accounting cycle is an involved process that requires different stages of analysis, adjustments and preparation. Towards the beginning of the cycle, transaction analysis and journal entries are recorded for items such as accounts payable and accounts receivable. At the end of the cycle, an unadjusted trial balance and adjusted trial balance are created, before closing entries are posted and a post closing trial balance is prepared. It is important to know the nuances of the accounting cycle, to understand what a trial balance is.
If the general ledger system has a post closing trial balance feature, then preparing the report is straightforward. If the trial balance is prepared manually in Excel from spreadsheets, it typically takes time at the end of the accounting period to make the adjusting and closing entries, to produce the post closing entries. The amount of time is contingent on the complexity of the business and the experience of the preparer.
Trial Balance Example
One only has to look to the balance sheet to see an example of what a post closing trial balance might look like. The trial balance sheet entries will contain all asset, liability and owner equity accounts or owner’s capital account and will typically be listed in that order. In the asset portion of the trial balance, you will see accounts such as cash, inventory, accounts receivable, fixed assets and accumulated depreciation. In the liability portion, you will see accounts payable, notes payable and customer deposits. In the owner equity portion, you might see paid-in-capital and a retained earnings account. Keep in mind the accounting equation which is assets = liabilities + owner’s equity.
The post-closing trial balance, which does not include revenue, gain, loss, expense accounts such as utility expense, supplies expense, insurance expenses, salaries expense, depreciation expenses, or summary account balances, is an effective tool for ensuring financial statements are accurate, complete and useful. Temporary accounts are reduced during the closing process when closing entries are posted, leaving only permanent accounts displayed on the balance sheet. The post-closing trial balance sheet accounts should show that the total of all the debit accounts balances equals the total of all credit accounts balances, which would then net to zero. The post-closing trial balance is the last step or final step in the accounting cycle, and then the cycle starts all over again for the next accounting period. It is the final trial balance before the new accounting period begins.
