When accountants “close” the books at the end of the month, quarter, or year, they’ll zero out temporary accounts, like revenues and expenses, and move their balances to retained earnings.
What’s left are the accounts that get reported on the balance sheet and their non-zero balances, which is called a post-closing trial balance.
As you continue reading below, we’ll cover post-closing trial balances in more detail, including key components and how they support accurate financial reporting.
Definition of post-closing trial balance
A post-closing trial balance is a prepared list of all accounts that still carry a balance at the end of the period. It is often simplified to just the “trial balance.”
After preparing the trial balance, accountants will check to make sure the total debits match the total credits.
Accountants are looking for a net-zero trial balance, which signals a successful period close and the end of the accounting cycle.
Purpose and importance of post-closing trial balance
While relatively simple and straightforward, preparing a post-closing trial balance is an important check to ensure accurate reporting in the coming period.
Since temporary accounts only track activity for a certain month, quarter, or year, they need to be closed out once the period ends. Thus, the post-closing trial balance gives accountants a final chance to ensure this was done properly.
By verifying that debits and credits are equal to one another, accountants can conclude that the closing process was completed accurately, and the company will start the new period with clean books.
Key components of a post-closing trial balance
Only permanent accounts are included in the trial balance, including assets, liabilities, and equity, such as:
- Cash
- Accounts receivable
- Inventory
- Property, plant, and equipment (PP&E)
- Accounts payable
- Notes payable
- Accrued expenses
- Common stock
- Retained earnings
As mentioned above, this excludes temporary accounts (revenues and expenses), which are zeroed out at the end of the period.
Pre-closing vs post-closing trial balance
There are three types of trial balances companies will prepare during the accounting cycle, including the post-closing version.
The other two are the unadjusted and adjusted trial balances, both of which are prepared before the temporary accounts are closed out. So, they include all company accounts.
As the name might suggest, the unadjusted trial balance is prepared before accountants record adjusting journal entries, and the adjusted balance is prepared afterward. Both are used to spot errors or discrepancies in the company’s records.
For this reason, the adjusted trial balance may be considered the “pre-closing” trial balance because it’s the final one that’s prepared when all accounts are considered balanced — but before temporary accounts have been closed out.
Thus, the main difference between the pre- and post-closing trial balance is that one includes all accounts and is completed earlier in the accounting cycle, while the other is the final balance that’s prepared and only contains permanent accounts.
How to prepare a post closing trial balance
Once the adjusted trial balance is finalized and the financial statements have been prepared, the post-closing trial balance is completed using the following steps:
- Close all temporary accounts by transferring their balances to the retained earnings account (revenues, expenses, dividends).
- Record the appropriate closing journal entries to the general ledger.
- Verify that all temporary accounts have a balance of zero.
- List out each of the permanent accounts with their corresponding balance.
- Confirm that the post-closing balance is zero, meaning credits are equal to debits.
While not an official financial statement, there’s a common post-closing trial balance format that accountants will follow. Here’s a simple example of a post-closing trial balance:
Post closing trial balance example
Common challenges and errors to watch out for
Though the post-closing trial balance is relatively simple and can be prepared in just a few steps, there are some hurdles accountants might face during this process, such as:
- The biggest mistake accountants might make is failing to close one of the temporary accounts and leaving it with a balance, which can create reporting errors in the following period.
- Conversely, accountants might accidentally close a permanent account, thinking it’s a temporary account.
- Teams preparing the trial balance by hand might make simple errors, like transposing numbers in an account’s balance, which could cause a discrepancy in the final balance.
Analyzing the post-closing trial balance
After completing the post-closing trial balance, accountants can verify that they’re ready to begin the new period. Here’s what teams can gather from this process:
Interpreting the post-closing trial balance
As discussed throughout, the post-closing trial balance should always be net-zero.
To clarify, the total debits and credits of all permanent accounts do not need to be zero. However, they should be equal to each other, resulting in a net-zero balance.
Again, this means that all temporary accounts have been closed out, and the company has fresh books to begin tracking revenues and expenses in the new period.
Identifying discrepancies and investigating potential errors
If the post-closing trial balance does not show equal debits and credits, it likely means that there was a mistake made during the closing process.
Since the team has likely already prepared and finalized the adjusted trial balance, the closing process is the only place for error.
In this case, accountants will need to review the closing entries once more to identify and fix and issue.
Simplify your period-end with BILL
Post-closing trial balances are a key component of the end-of-period closing procedures.
The process can be relatively quick when done correctly. However, closing out the wrong accounts or making other small mistakes or omissions can snowball into serious problems in the following period.
To combat the risk of human error in financial reporting, growing businesses often turn to financial operations solutions, like BILL, to help automate routine tasks and manage accounts payable, accounts receivable, and expense management with ease.
