The last step in the accounting cycle (not counting reversing entries) is to prepare a post-closing trial balance. For a recap, we have three types of trial balance. They are prepared at different stages in the accounting cycle but have the same purpose – i.e. to test the equality between debits and credits.
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.
To illustrate, here is a sample adjusted trial balance:
| Gray Electronic Repair Services | ||||
| Adjusted Trial Balance | ||||
| December 31, 2021 | ||||
| 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 closer 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.
In the 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).
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, 2021 | ||||
| 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.
A post-closing trial balance is, as the term suggests, prepared after closing entries are recorded and posted. It is the third (and last) trial balance prepared in the accounting cycle.
Since temporary accounts are already closed at this point, the post-closing trial balance will not include income, expense, and withdrawal accounts. It will only include balance sheet accounts, a.k.a. real or permanent accounts.
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