The Accounting Cycle

Read each section on this page. You have been exposed to the concepts of recording and journalizing transactions previously, but this explains the rest of the accounting process. The accounting cycle is the repetitive set of steps that must occur in every business every period in order to meet reporting requirements.

The Post-Closing Trial Balance

A post-closing trial balance is a trial balance taken after the closing entries have been posted.


Learning Objective

  • Explain the post-closing trial balance and why it is necessary


Key Points

  • A post-closing trial balance checks the accuracy of the closing process.
  • A post-closing trial balance proves that the books are in balance at the start of the new accounting period.
  • The post-closing trial balance differs from the adjusted trial balance.


Terms

  • closing entry
    a journal entry made at the end of an accounting period to transfer temporary accounts to permanent accounts
  • trial balance
    a statement of the balances of all nominal accounts in a double-entry ledger, made to test their equality
  • adjusted trial balance
    a list of all the General ledger accounts (both revenue and capital) contained in the ledger of a business after adjusting entries are made
  • credit
    an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease asset and expense accounts
  • post-closing trial balance
    a check that closing entries were done correctly
  • debit
    an entry in the left hand column of an account to record a debt; debits increase asset and expense accounts and decrease liability, income, and equity accounts


Examples
  • Using our Highland Yoga example, we can see a situation in which the post-closing trial balance resolves debits and credits: By adding the debits together, as well as the credits together, we see that each reconcile to $2,020 in July. The August closing entries are as follows: By summing the debits together, and the credits together, we see that each reconcile to $2,120 in August.


The Post-closing Trial Balance

The post-closing trial balance is the last step in the accounting cycle. It is prepared after all of that period's business transactions have been posted to the General Ledger via journal entries. The post-closing trial balance can only be prepared after each closing entry has been posted to the General Ledger. The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account. After the closing entries are posted, these temporary accounts will have a zero balance. The permanent balance sheet accounts will appear on the post-closing trial balance with their balances. When the post-closing trial balance is run, the zero balance temporary accounts will not appear. However, all the other accounts having non-negative balances are listed, including the retained earnings account. As with the trial balance, the purpose of the post-closing trial balance is to ensure that debits equal credits.

The Trial Balance

The Trial Balance

The post-closing trial balance proves debits still equal credits after the closing entries have been made.


Why the Post-Closing Trial Balance Is Necessary

While each accounting period has a beginning and an end, the periods do use information from the previous period. That is why it is necessary to run a post-closing trial balance. The preparation of a post-closing trial balance serves as a check on the accuracy of the closing process and ensures that the books are in balance at the start of the new accounting period. The post-closing trial balance differs from the adjusted trial balance in only two important respects: It excludes all temporary accounts since they have been closed, and it updates the retained earnings account to its proper ending balance.


Calculating Post-Closing Trial Balance

Using our Highland Yoga example, we can see a situation in which the post-closing trial balance resolves debits and credits:

Example 1

Example 1 Closing entries for Highland Yoga in July.

By adding the debits together, as well as the credits together, we see that each reconcile to $2,020 in July.

The August closing entries are as follows:

Example 2 Closing entries for Highland Yoga in August.

Example 2 Closing entries for Highland Yoga in August.

By summing the debits together, and the credits together, we see that each reconcile to $2,120 in August.