Post-Closing Trial Balance Explained With Examples
A post-closing trial balance is an important step in the accounting cycle. It is prepared after all closing entries are completed at the end of a reporting period. This document ensures that only permanent accounts remain in the ledger and confirms the books are balanced before the start of a new period.
Preparing an accurate post-closing trial balance is essential for maintaining reliable financial records and acts as a final checkpoint for businesses. Getting this step right is just one of the ways a professional gives small businesses peace of mind that all is in order and ready for the next cycle.
What Is a Post-Closing Trial Balance?
A post-closing trial balance is a report prepared after all the closing entries have been made at the end of a reporting period. This could be monthly, quarterly, or annually.
The IRS describes it as the “final check in the balance of the ledger,” as its main function is to ensure that a company's general ledger is balanced and ready for the next accounting cycle. It also verifies that total debits equal total credits.
A company's post-closing trial balance includes only permanent accounts like assets, liabilities, and equity. This makes it different from a regular trial balance, which presents both permanent and temporary accounts (revenues, expenses, and dividends or withdrawals).
Post-closing trial balances serve as a starting point for a new accounting cycle. Getting it right is key to ensuring your books are balanced. Many businesses seek assistance from experts in small business accounting to ensure a smooth start and completion of each accounting period.
Why Is a Post-Closing Trial Balance Important?
A post-closing trial balance is important as it verifies the accuracy of the closing process at the end of an accounting cycle. As it only shows permanent accounts, it also confirms that temporary accounts have been closed to retained earnings or capital.
An accurate post-closing trial balance ensures the books are balanced before the start of the next accounting period. This means companies start a new period with a clean record. Having reliable records of each accounting period is essential to present accurate financial statements and ensure compliance with the relevant accounting standards.
Trial Balance vs Post-Closing Trial Balance
The main differences between a trial balance and a post-closing trial balance are when they're prepared and the accounts they include. A trial balance is prepared before closing entries and includes both temporary and permanent accounts. Its purpose is to ensure total debits equal total credits after adjustments. A trial balance can be prepared before or after adjusting entries are made. The latter is called an adjusted trial balance.
A post-closing trial balance is prepared after closing entries and only includes permanent accounts. Companies use it internally to ensure books are in balance and are ready for the next accounting period.
Is a Trial Balance the Same as a Balance Sheet?
No, there are clear differences between a trial balance and a balance sheet. A trial balance is used internally to check that debits equal credits. A balance sheet is a formal financial statement used externally to show a company's assets, liabilities, and equity at a specific point in time.
How to Prepare a Post-Closing Trial Balance
Your accountant will take the following steps to prepare your post-closing trial balance:
Close temporary accounts: Revenue accounts, expense accounts, income summary, and dividends/withdrawals. Only balance sheet accounts (permanent accounts like assets, liabilities, and equity) should still have balances.
List permanent accounts: assets, liabilities, owners’ equity/retained earnings.
Enter balances in debit or credit columns.
Calculate debit and credit columns: Debits must equal credits.
Example of a Post-Closing Trial Balance
|
Account |
Debit ($) |
Credit ($) |
|
Cash |
20,000 |
|
|
Accounts Receivable |
10,000 |
|
|
Equipment |
30,000 |
|
|
Accumulated Depreciation |
4,000 |
|
|
Accounts Payable |
8,000 |
|
|
Notes Payable |
20,000 |
|
|
Retained Earnings Account |
28,000 |
|
|
Total |
60,000 |
60,000 |
Many small businesses work with an accounting professional to prepare their post-closing trial balance. This ensures everything is correct and compliant.
Top Post-Closing Trial Balance Mistakes to Avoid
Checking and re-checking your books will substantially aid in making sure they're correct. However, costly errors can sometimes slip through the net:
Mistake 1: Including Temporary Accounts in the Post-Closing Trial Balance
Temporary accounts must have zero balances after making closing entries. Temporary accounts are included in a trial balance, but not in a post-closing trial balance.
How to avoid: Double-check closing entries and check the ledger to ensure temporary accounts have zero balances.
Mistake 2: Reporting Incorrect Account Balances
Not updating the balances after closing entries will lead to wrong balances from the general ledger being carried forward.
How to avoid: Double-check ledger balances after posting closing entries. Always make sure all balances reflect the post-closing status.
Mistake 3: Including Adjusted Entries Rather Than Final Balances
The post-closing trial balance must reflect the final balances of all your permanent accounts. Using balances before adjusting or closing entries will lead to inaccurate reporting.
How to avoid: Only use the updated ledger, not the adjusted or unadjusted trial balance. Always ensure closing entries have been journalized and posted before using their data.
Mistake 4: Calculation Errors
Miscalculating totals in the debit and credit columns is an easy mistake to make for small business owners who attempt to do their own accounting.
How to avoid: Using accounting software is useful for some small businesses to get a better feel for their accounting. However, working with an expert can help you avoid simple but potentially costly miscalculations.
Be aware that a balanced post-closing trial balance isn't a guarantee that your books are correct. Errors like not recording and posting transactions to the ledger, or posting transactions twice, won't necessarily be flagged by seemingly correct trial balances. Seeking professional help is the best way to ensure your books are correct from the beginning to the end of the accounting cycle.
Start Your Next Accounting Cycle With Confidence
Preparing a post-closing trial balance is a vital part of closing your books and starting a new accounting period with confidence. Taking the time to get your post-closing trial balance right is a helpful step towards long-term financial accuracy and compliance in your business.
Errors while preparing financial documents lead to larger issues down the line. Work with a professional to ensure each period starts and ends accurately and compliantly.