It also serves as the basis of preparing the financial statement. The preparation of the post-closing trial balance is the last step in the accounting cycle. The post-closing trial balance presents the lists of all the accounts whose closing entries are passed and posted in their respective ledger accounts. It is the third trial balance prepared in the accounting cycle to verify the totals of debits and credits.

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. The balances of the nominal accounts (income, expense, and withdrawal accounts) have been absorbed by the capital account – Mr. Gray, Capital.

DebitsDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. Before that, it had a credit balance of 9,850 as seen in the adjusted trial balance above.

1. The total debit to income summary should match total expenses from the income statement.
2. Though, this does not indicate that the entry itself is correct.
3. Now that the journal entries are prepared and posted, you are almost ready to start next year.
4. The big difference between this and the other trial balances is that the balance in the revenue and expense accounts should be zero.

The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance. The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings.

Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. All accounts can be classified as either permanent (real) or temporary (nominal) (Figure 5.3). For partnerships, each partners’ capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C). For corporations, Income Summary is closed entirely to “Retained Earnings”.

This is an optional step in the accounting cycle that you will learn about in future courses. Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7 were covered in The Adjustment Process. Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet.

Permanent Versus Temporary Accounts

You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000. For our purposes, assume that we are closing the books at the end of each month unless otherwise noted. After preparing the closing entries above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5).

Practice Questions: Types of Accounts

We do not need to show accounts with zero balances on the trial balances. Though, this does not indicate that the entry itself is correct. Typically, you prepare the trial balance sheet at the end of the financial year.

Below are the T accounts with the journal entries already posted. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings. We have completed the first two columns and now we have the final column which represents the closing (or archive) process. The post-closing trial balance for Printing Plus is shown in Figure 5.8. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. Notice that the Income Summary account is now zero and is ready for use in the next period.

Module 4: Completing the Accounting Cycle

To make the balance zero, debit the revenue account and credit the Income Summary account. From this trial balance, as we learned in the prior section, you make your financial statements. After the financial statements are finalized and you are 100 percent sure after closing entries have been posted that all the adjustments are posted and everything is in balance, you create and post the closing entries. The closing entries are the last journal entries that get posted to the ledger. If dividends were not declared, closing entries would cease at this point.

And just like any other trial balance, total debits and total credits should be equal. At this point, the accounting cycle is complete, and the company can begin a new cycle in the next period. https://simple-accounting.org/ In essence, the company’s business is always in operation, while the accounting cycle utilizes the cutoff of month-end to provide financial information to assist and review the operations.

If you like quizzes, crossword puzzles, fill-in-the-blank, matching exercise, and word scrambles to help you learn the material in this course, go to My Accounting Course for more. Notice that the balance of the Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses.

What are Temporary Accounts?

Show bioRebekiah has taught college accounting and has a master’s in both management and business. All accounts can be classified as either permanent or temporary (Figure 5.3). It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year.

In essence, we are updating the capital balance and resetting all temporary account balances. Now for this step, we need to get the balance of the Income Summary account. In step 1, we credited it for $9,850 and debited it in step 2 for $8,790.

Its purpose is to test the equality between debits and credits after the recording phase. Closing journal entries are made at the end of an accounting period to prepare the accounting records for the next period. They zero-out the balances of temporary accounts during the current period to come up with fresh slates for the transactions in the next period. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account.

Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand. In this chapter, we complete the final steps (steps 8 and 9) of the accounting cycle, the closing process. You will notice that we do not cover step 10, reversing entries.