5 1 Describe and Prepare Closing Entries for a Business Principles of Accounting, Volume 1: Financial Accounting

The distribution of net income to the company shareholders is shown as the debit balance of Dividends account which must be closed to the debit of Retaining Earnings. Since there are several types of errors that trial balances fail to uncover, each closing entry must be journalized and posted carefully. The balances of the nominal accounts have been absorbed by the capital account – Mr. Gray, Capital. Hence, you will not see any nominal account in the post-closing trial balance. They all have the same purpose (i.e. to test the equality between debits and credits) although they are prepared at different stages in the accounting cycle.

Such an analysis helps your management to understand the business trends and accordingly take the necessary actions. These decisions may be regarding your manufacturing costs, business expenses, incomes, etc. “Post Closing” is when the title company dots the i’s and crosses the t’s.

1. They are also transparent with their internal trial balances in several key government offices.
2. Permanent (real) accounts are accounts that transfer balances to the next period and include balance sheet accounts, such as assets, liabilities, and stockholders’ equity.
3. Because you made closing entries for revenue and expenses, those accounts do not appear on the post-closing trial balance.
4. When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match.

Income statement items are the temporary accounts and they are not included in the post-closing trial balance. Having an up to date post-closing trial balance also helps in the adjustment of the accounts. Thus, we can say that the first step in preparing the basic financial statements is to formulate a tallied out trial balance.

Post-Closing Trial Balance

This is no different from what will happen to a company at the end of an accounting period. A company will see its revenue and expense accounts set back to zero, but its assets and liabilities will maintain a balance. Stockholders’ equity accounts will also maintain their balances. In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts.

2 Prepare a Post-Closing Trial Balance

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. Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations). A net loss would decrease owner’s capital, so we would do the opposite in this journal entry by debiting the capital account and crediting Income Summary.

Unlike previous trial balances, the retained earnings figure is included, which was obtained through the closing process. Remember the income statement is like a moving picture of a business, reporting revenues and expenses for a period of time (usually a year). We see from the adjusted trial after closing entries have been posted balance that our revenue accounts have a credit balance. To make them zero we want to decrease the balance or do the opposite. We will debit the revenue accounts and credit the Income Summary account. The credit to income summary should equal the total revenue from the income statement.

Totals of both the debit and credit columns will be calculated at the bottom end of the post-closing trial balance. These columns should balance, otherwise, it would likely mean that there has been an error in posting of the adjusting entries. A list of the accounts and their balances at the end of the accounting period after closing entries have been journalized and posted.

You might be asking yourself, “is the Income Summary account even necessary? ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account? We could do this, but by having the Income Summary account, you get a balance for net income a second time. This gives you the balance https://simple-accounting.org/ to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings.

Step 3: Close Income Summary account

The post-closing trial balance contains real accounts only since all nominal accounts have already been closed at this stage. 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.

Journalizing and Posting Closing Entries

If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend. The second part is the date of record that determines who receives the dividends, and the third part is the date of payment, which is the date that payments are made. Printing Plus has $100 of dividends with a debit balance on the adjusted trial balance.

Step 3: Close Income Summary to the appropriate capital account

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.

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 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.

The last step in the process is preparing the post-closing trial balance. The big difference between this and the other trial balances is that the balance in the revenue and expense accounts should be zero. The Retained Earnings account balance is currently a credit of $4,665. Answer the following questions on closing entries and rate your confidence to check your answer. We have completed the first post closing trial balance two columns and now we have the final column which represents the closing process. Adjusted Trial BalanceAdjusted Trial Balance is a statement which incorporates all the relevant adjustments.