The ninth, and typically final, step of the process is to
prepare a post-closing trial balance. The word “post” in this
instance means “after.” You are preparing a trial balance
after the closing entries are
complete.
Like all trial balances, the post-closing trial balance has the
job of verifying that the debit and credit totals are equal. The
post-closing trial balance has one additional job that the other
trial balances do not have. The post-closing trial balance is also
used to double-check that the only accounts with balances after the
closing entries are permanent accounts. If there are any temporary
accounts on this trial balance, you would know that there was an
error in the closing process. This error must be fixed before
starting the new period.
The process of preparing the post-closing trial balance is the
same as you have done when preparing the unadjusted trial balance
and adjusted trial balance. Only permanent account balances should
appear on the post-closing trial balance. These balances in
post-closing T-accounts are transferred over to either the debit or
credit column on the post-closing trial balance. When all accounts
have been recorded, total each column and verify the columns equal
each other.
The post-closing trial balance for Printing Plus is shown in
Figure 5.8.
Notice that only permanent accounts are included. All temporary
accounts with zero balances were left out of this statement. Unlike
previous trial balances, the retained earnings figure is included,
which was obtained through the closing process.
At this point, the accounting cycle is complete, and the company
can begin a new cycle in the next period. 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.
It is worth mentioning that there is one step in the process
that a company may or may not include, step 10, reversing entries.
Reversing entries reverse an adjusting entry made in a prior period
at the start of a new period. We do not cover reversing entries in
this chapter, but you might approach the subject in future
accounting courses.
Now that we have completed the accounting cycle, let’s take a
look at another way the adjusted trial balance assists users of
information with financial decision-making.
LINK TO LEARNING
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. This website covers a variety of
accounting topics including financial accounting basics, accounting
principles, the accounting cycle, and financial statements, all
topics introduced in the early part of this course.
CONCEPTS IN PRACTICE
The Importance of Understanding How to Complete the Accounting
Cycle
Many students who enroll in an introductory accounting course do
not plan to become accountants. They will work in a variety of jobs
in the business field, including managers, sales, and finance. In a
real company, most of the mundane work is done by computers.
Accounting software can perform such tasks as posting the journal
entries recorded, preparing trial balances, and preparing financial
statements. Students often ask why they need to do all of these
steps by hand in their introductory class, particularly if they are
never going to be an accountant. It is very important to understand
that no matter what your position, if you work in business you need
to be able to read financial statements, interpret them, and know
how to use that information to better your business. If you have
never followed the full process from beginning to end, you will
never understand how one of your decisions can impact the final
numbers that appear on your financial statements. You will not
understand how your decisions can affect the outcome of your
company.
As mentioned previously, once you understand the effect your
decisions will have on the bottom line on your income statement and
the balances in your balance sheet, you can use accounting software
to do all of the mundane, repetitive steps and use your time to
evaluate the company based on what the financial statements show.
Your stockholders, creditors, and other outside professionals will
use your financial statements to evaluate your performance. If you
evaluate your numbers as often as monthly, you will be able to
identify your strengths and weaknesses before any outsiders see
them and make any necessary changes to your plan in the following
month