A Post Closing Trial Balance Will Show

A post-closing trial balance, a critical step in the accounting cycle, acts as a final verification of the accuracy of the financial records after all closing entries have been made. This balance provides assurance that debits equal credits, ensuring the integrity of the accounting equation before the start of a new accounting period.

Understanding the Post-Closing Trial Balance

The post-closing trial balance focuses solely on permanent accounts. These are the accounts that carry their balances forward from one accounting period to the next. Understanding which accounts are included and excluded is key to interpreting this balance.

Permanent Accounts (Balance Sheet Accounts):

• Assets: Resources owned by the company (e.g., cash, accounts receivable, inventory, equipment).
• Liabilities: Obligations owed by the company to others (e.g., accounts payable, salaries payable, loans payable).
• Equity: The owners' stake in the company (e.g., common stock, retained earnings).

Temporary Accounts (Income Statement Accounts):

• Revenues: Inflows of cash or other assets from the sale of goods or services.
• Expenses: Outflows of cash or other assets incurred in the process of generating revenue.
• Dividends: Distributions of a company's earnings to its shareholders.

The post-closing trial balance will only show the balances of asset, liability, and equity accounts. Revenue, expense, and dividend accounts will have zero balances because their balances are closed out to retained earnings at the end of the accounting period.

The Accounting Cycle and the Post-Closing Trial Balance

The post-closing trial balance is one of the final steps in the accounting cycle. To fully understand its purpose, it's helpful to review the entire cycle:

1. Identify and Analyze Transactions: This involves gathering documentation (invoices, receipts, etc.) and analyzing the financial impact of each transaction.
2. Journalize Transactions: Transactions are recorded in the general journal, which is a chronological record of all financial transactions.
3. Post to the General Ledger: Journal entries are transferred (posted) to the general ledger, which contains individual accounts for each asset, liability, equity, revenue, and expense.
4. Prepare an Unadjusted Trial Balance: This is a list of all accounts and their balances at a specific point in time. It's used to verify that debits equal credits.
5. Prepare Adjusting Entries: Adjusting entries are made to update accounts for items such as accrued revenues, accrued expenses, deferred revenues, and deferred expenses. These entries ensure that the financial statements accurately reflect the company's financial position and performance.
6. Prepare an Adjusted Trial Balance: This is a trial balance prepared after adjusting entries have been made. It's used to verify that debits equal credits after adjustments.
7. Prepare Financial Statements: The financial statements (income statement, balance sheet, statement of cash flows, and statement of retained earnings) are prepared using the adjusted trial balance.
8. Prepare Closing Entries: Closing entries are made to transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings. This process prepares the accounts for the next accounting period.
9. Prepare a Post-Closing Trial Balance: This is the final step in the accounting cycle. It verifies that debits equal credits after closing entries have been made.

What a Post-Closing Trial Balance Will Show: A Detailed Look

The post-closing trial balance presents a summarized view of a company's assets, liabilities, and equity after all temporary accounts have been closed. Here's a more detailed breakdown of what you can expect to see:

Assets:

• Cash: The amount of cash on hand and in bank accounts.
• Accounts Receivable: The amount of money owed to the company by its customers.
• Inventory: The cost of goods held for sale to customers.
• Prepaid Expenses: Expenses paid in advance, such as insurance premiums or rent.
• Property, Plant, and Equipment (PP&E): The cost of long-term assets used in the business, such as buildings, equipment, and vehicles.
• Accumulated Depreciation: The cumulative amount of depreciation expense recognized on PP&E. This will be a credit balance and reduces the net book value of PP&E.
• Intangible Assets: Assets that do not have a physical form, such as patents, trademarks, and goodwill.

Liabilities:

• Accounts Payable: The amount of money owed by the company to its suppliers.
• Salaries Payable: The amount of salaries owed to employees.
• Unearned Revenue: Revenue received in advance for goods or services that have not yet been provided.
• Notes Payable: The amount of money owed to lenders under formal loan agreements.
• Bonds Payable: Long-term debt issued by the company to investors.

Equity:

• Common Stock: The amount of money invested in the company by its shareholders.
• Retained Earnings: The accumulated profits of the company that have not been distributed to shareholders as dividends. This balance reflects the net effect of all revenues, expenses, and dividends from prior periods.

Example:

Let's say a company, "XYZ Company," has the following balances after closing entries:

The post-closing trial balance for XYZ Company would show these balances, confirming that total debits equal total credits.

Why is the Post-Closing Trial Balance Important?

The post-closing trial balance serves several important functions:

• Error Detection: It helps to detect errors that may have occurred during the closing process. If debits and credits do not balance, it indicates that there is an error that needs to be investigated and corrected.
• Verification of Accuracy: It verifies that the accounting equation (Assets = Liabilities + Equity) is in balance after closing entries. This is crucial for ensuring the integrity of the financial statements.
• Starting Point for the Next Period: It provides a clean slate for the next accounting period. By closing out temporary accounts, the post-closing trial balance ensures that the new period starts with only permanent account balances.
• Audit Trail: It serves as an important part of the audit trail. Auditors can use the post-closing trial balance to trace transactions and verify the accuracy of the financial records.
• Financial Statement Reliability: By confirming the accuracy of the permanent accounts, the post-closing trial balance enhances the reliability of the balance sheet, which presents a snapshot of the company's financial position at a specific point in time.

Common Errors and How to Avoid Them

Despite its straightforward nature, errors can still occur when preparing a post-closing trial balance. Here are some common mistakes and how to avoid them:

• Including Temporary Accounts: The most common mistake is including revenue, expense, or dividend accounts in the post-closing trial balance. Always double-check that only permanent accounts are included.
• Incorrect Account Balances: Using the wrong balance for an account can throw off the entire trial balance. Carefully verify the balance of each account in the general ledger before including it in the trial balance.
• Mathematical Errors: Simple addition or subtraction errors can lead to an imbalance. Use a calculator or spreadsheet software to minimize mathematical mistakes.
• Transposition Errors: Transposing numbers (e.g., writing 123 as 132) can be difficult to catch. Double-check each number to ensure it is recorded correctly.
• Omission Errors: Forgetting to include an account in the trial balance will obviously cause an imbalance. Use a checklist to ensure that all relevant accounts are included.

Using Software for Post-Closing Trial Balance

Most accounting software packages, such as QuickBooks, Xero, and Sage, automate the process of preparing a post-closing trial balance. These programs:

• Automatically close temporary accounts.
• Generate the post-closing trial balance with a few clicks.
• Reduce the risk of errors.
• Save time and effort.

Even with automated software, it's still important to understand the underlying principles of the post-closing trial balance and to review the results to ensure accuracy.

Post-Closing Trial Balance vs. Other Trial Balances

It's important to distinguish the post-closing trial balance from other types of trial balances used in the accounting cycle:

• Unadjusted Trial Balance: Prepared before adjusting entries, it includes all general ledger accounts (both permanent and temporary) and their balances.
• Adjusted Trial Balance: Prepared after adjusting entries but before closing entries, it also includes all general ledger accounts (both permanent and temporary) and their adjusted balances.
• Post-Closing Trial Balance: Prepared after closing entries, it includes only permanent accounts (assets, liabilities, and equity) and their balances.

The key difference is the inclusion or exclusion of temporary accounts. The unadjusted and adjusted trial balances include all accounts, while the post-closing trial balance only includes permanent accounts.

The Impact on Financial Statements

The post-closing trial balance directly impacts the balance sheet, which is one of the core financial statements. Since the post-closing trial balance verifies the accuracy of the asset, liability, and equity accounts, it ensures that the balance sheet accurately reflects the company's financial position at the end of the accounting period.

The income statement, which reports a company's financial performance over a period of time, is not directly affected by the post-closing trial balance because the revenue and expense accounts are closed out before the post-closing trial balance is prepared. However, the net income (or net loss) calculated on the income statement is ultimately reflected in the retained earnings account, which is included in the post-closing trial balance.

Advanced Considerations

While the basic concept of a post-closing trial balance is relatively simple, there are some more advanced considerations to keep in mind:

• Subsidiary Ledgers: Companies often use subsidiary ledgers to track details of specific accounts, such as accounts receivable or accounts payable. The balances in the subsidiary ledgers should reconcile with the corresponding control accounts in the general ledger, which are then included in the post-closing trial balance.
• Consolidated Financial Statements: When a company has subsidiaries, it prepares consolidated financial statements that combine the financial results of the parent company and its subsidiaries. The post-closing trial balance for the consolidated entity would include the asset, liability, and equity accounts of all companies in the group.
• International Financial Reporting Standards (IFRS): While the basic principles of the post-closing trial balance are the same under both IFRS and U.S. GAAP, there may be some differences in the specific accounts that are used and how they are classified.
• Internal Controls: A strong system of internal controls is essential for ensuring the accuracy of the financial records and the reliability of the post-closing trial balance. This includes controls over transaction processing, account reconciliation, and financial reporting.

Conclusion

The post-closing trial balance is a crucial step in the accounting cycle. By verifying the equality of debits and credits in the permanent accounts after closing entries, it ensures the accuracy and reliability of the financial statements and provides a clean starting point for the next accounting period. Understanding its purpose, content, and preparation is essential for anyone involved in the accounting process. Remember to focus on permanent accounts, avoid common errors, and leverage accounting software to streamline the process. By doing so, you can ensure the integrity of your financial records and make informed business decisions.