Principles of Financial Accounting: The Accounting Cycle - PostClosing Trial Balance

What It Is

A post-closing trial balance is a list of all general ledger accounts after all closing entries have been recorded. It ensures that the accounting equation (Assets = Liabilities + Equity) is balanced and that all temporary accounts have been closed. If a company has $100,000 in cash and $50,000 in accounts payable, the post-closing trial balance will show these balances after all closing entries have been recorded.

Key Concepts & Formulas

• Temporary Account: An account that is closed at the end of each accounting period, such as Revenue and Expense accounts. Example: Sales Revenue is a temporary account that is closed at the end of the year.
• Permanent Account: An account that is not closed at the end of each accounting period, such as Asset, Liability, and Equity accounts. Example: Cash is a permanent account that is not closed at the end of the year.
• Closing Entry: A journal entry that transfers the balance of a temporary account to a permanent account. Example: Closing the Sales Revenue account by transferring its balance to the Retained Earnings account.
• Post-Closing Trial Balance: A list of all general ledger accounts after all closing entries have been recorded. Example: A post-closing trial balance that shows the balance of the Cash account as $100,000.
• Account Type: The type of account, such as Asset, Liability, Equity, Revenue, or Expense. Example: The Cash account is an Asset account.
• Normal Balance: The expected debit or credit balance of an account. Example: The Cash account has a normal debit balance.
• GAAP: Generally Accepted Accounting Principles, the set of rules and guidelines that accountants follow when preparing financial statements. Example: GAAP requires that all temporary accounts be closed at the end of each accounting period.
• Accounting Equation: The equation that shows the relationship between Assets, Liabilities, and Equity. Example: Assets = Liabilities + Equity.
• Trial Balance: A list of all general ledger accounts and their balances. Example: A trial balance that shows the balance of the Sales Revenue account as $100,000.

Journal Entry Examples

Example 1: Closing the Sales Revenue Account

Dr. Retained Earnings $100,000 Cr. Sales Revenue $100,000

This journal entry closes the Sales Revenue account by transferring its balance to the Retained Earnings account.

Example 2: Closing the Cost of Goods Sold Account

Dr. Cost of Goods Sold $50,000 Cr. Retained Earnings $50,000

This journal entry closes the Cost of Goods Sold account by transferring its balance to the Retained Earnings account.

Example 3: Closing the Net Income Account

Dr. Retained Earnings $20,000 Cr. Net Income $20,000

This journal entry closes the Net Income account by transferring its balance to the Retained Earnings account.

Common Mistakes

Mistake 1: Confusing Debits and Credits for Expense Accounts

• Correction: Expense accounts are debited, not credited. Remember the rule: "Expenses are debited, not credited."
• Mnemonic: "E-D-C" (Expenses are Debit, not Credit)

Mistake 2: Not Closing Temporary Accounts

• Correction: Temporary accounts must be closed at the end of each accounting period. Remember the rule: "Temporary accounts are closed, not permanent accounts."
• Mnemonic: "T-C-P" (Temporary accounts are Closed, not Permanent accounts)

Mistake 3: Not Recording Closing Entries

• Correction: Closing entries must be recorded at the end of each accounting period. Remember the rule: "Closing entries are recorded, not ignored."
• Mnemonic: "C-E-R" (Closing Entries are Recorded)

Exam Tips

Tip 1: Remember the Accounting Equation

• Tip: The accounting equation is Assets = Liabilities + Equity. Remember this equation to ensure that your financial statements are balanced.
• Trap: Don't forget to include all accounts in the accounting equation.

Tip 2: Identify Temporary and Permanent Accounts

• Tip: Temporary accounts are closed at the end of each accounting period, while permanent accounts are not. Remember this rule to ensure that your financial statements are accurate.
• Trap: Don't confuse temporary and permanent accounts.

Tip 3: Record Closing Entries

• Tip: Closing entries must be recorded at the end of each accounting period to ensure that temporary accounts are closed and financial statements are accurate.
• Trap: Don't forget to record closing entries.

Quick Practice

Problem 1: Closing the Sales Revenue Account

What is the adjusting entry for closing the Sales Revenue account if its balance is $100,000?

Answer: Dr. Retained Earnings $100,000, Cr. Sales Revenue $100,000

Problem 2: Closing the Cost of Goods Sold Account

What is the adjusting entry for closing the Cost of Goods Sold account if its balance is $50,000?

Answer: Dr. Cost of Goods Sold $50,000, Cr. Retained Earnings $50,000

Problem 3: Closing the Net Income Account

What is the adjusting entry for closing the Net Income account if its balance is $20,000?

Answer: Dr. Retained Earnings $20,000, Cr. Net Income $20,000

Last-Minute Cram Sheet

1. Dividends are NOT an expense – they go directly to retained earnings.
2. Temporary accounts are closed at the end of each accounting period.
3. Permanent accounts are not closed at the end of each accounting period.
4. Closing entries are recorded at the end of each accounting period.
5. The accounting equation is Assets = Liabilities + Equity.
6. Assets have a normal debit balance.
7. Liabilities have a normal credit balance.
8. Equity has a normal credit balance.
9. Revenue accounts have a normal credit balance.
10. Expense accounts have a normal debit balance.