Post-Closing Trial Balance

The last step in the accounting cycle is to prepare a post-closing trial balance.

A post-closing trial balance is prepared after closing entries are made and posted to the ledger.

It is the third trial balance prepared in the accounting cycle.

For a recap, we have three types of trial balance. They all have the same purpose (i.e. to test the equality between debits and credits) although they are prepared at different stages in the accounting cycle.

1. Unadjusted trial balance - This is prepared after journalizing transactions and posting them to the ledger. Its purpose is to test the equality between debits and credits after the recording phase.

2. Adjusted trial balance - This is prepared after adjusting entries are made and posted. Its purpose is to test the equality between debits and credits after adjusting entries are prepared. It is also the basis in preparing the financial statements.

An adjusted trial balance contains nominal and real accounts. Nominal accounts are those that are found in the income statement, and withdrawals. Real accounts are those found in the balance sheet.

3. 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 contains real accounts only since all nominal accounts have already been closed at this stage.

Example

To illustrate, here is a sample adjusted trial balance:

Gray Electronic Repair Services
Adjusted Trial Balance
December 31, 2014
         
Account Title   Debit   Credit
Cash   $    7,480.00    
Accounts Receivable   3,700.00    
Service Supplies   600.00    
Furniture and Fixtures   3,000.00    
Service Equipment   16,000.00    
Accumulated Depreciation       $      720.00
Accounts Payable       9,000.00
Utilities Payable       1,800.00
Loans Payable       12,000.00
Mr. Gray, Capital       13,200.00
Mr. Gray, Drawing   7,000.00    
Service Revenue       9,850.00
Rent Expense   1,500.00    
Salaries Expense   3,500.00    
Taxes and Licenses   370.00    
Utilities Expense   1,800.00    
Service Supplies Expense   900.00    
Depreciation Expense   720.00    
Totals   $  46,570.00   $  46,570.00

At the end of the period, the following closing entries were made:

Dec 31 Service Revenue 9,850.00  
    Income Summary   9,850.00
         
  31 Income Summary 8,790.00  
    Rent Expense   1,500.00
    Salaries Expense   3,500.00
    Taxes and Licenses   370.00
    Utilities Expense   1,800.00
    Service Supplies Expense   900.00
    Depreciation Expense   720.00
           
  31 Income Summary 1,060.00  
    Mr. Gray, Capital   1,060.00
         
  31 Mr. Gray, Capital 7,000.00  
    Mr. Gray, Drawing   7,000.00

After posting the above entries, all the nominal accounts would zero-out, hence the term "closing entries". Let's take a look.

In the first closing entry, Service Revenue was debited. Before that, it had a credit balance of 9,850 as seen in the adjusted trial balance above. Now its balance would be zero.

Second entry. All expenses were credited. Before that, they had debit balances for the same amounts. They would now have zero balances.

In the first and second closing entries, the balances of Service Revenue and the various expense accounts were actually transferred to Income Summary, which is a temporary account. The Income Summary account would have a credit balance of 1,060 (9,850 credit in the first entry and 8,790 debit in the second).

Income Summary is then closed to the capital account as shown in the third closing entry.

And finally, in the fourth entry the drawing account is closed to the capital account. At this point, the balance of the capital account would be 7,260 (13,200 credit balance, plus 1,060 credited in the third closing entry, and minus 7,000 debited in the fourth entry).

Post-Closing Trial Balance Example

After incorporating the closing entries above, the post-closing trial balance would look like this:

Gray Electronic Repair Services
Post-Closing Trial Balance
December 31, 2014
         
Account Title   Debit   Credit
Cash   $    7,480.00    
Accounts Receivable   3,700.00    
Service Supplies   600.00    
Furniture and Fixtures   3,000.00    
Service Equipment   16,000.00    
Accumulated Depreciation       $      720.00
Accounts Payable       9,000.00
Utilities Payable       1,800.00
Loans Payable       12,000.00
Mr. Gray, Capital       7,260.00
Totals   $  30,780.00   $  30,780.00

The balances of the nominal accounts (income, expense, and withdrawal accounts) have been absorbed by the capital account – Mr. Gray, Capital. Hence, you will not see any nominal account in the post-closing trial balance.

And just like any other trial balance, total debits and total credits should be equal.

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