Account flow Chart

Account Flow Chart

What is a post-closing trial balance?

 

A post-closing trial balance is a listing of all balance sheet accounts containing non-zero balances at the end of a reporting period. The post-closing trial balance contains no revenue, expense, or summary account balances, since these temporary accounts have already been closed and their balances moved into the retained earnings account in the balance sheet as part of the closing process.

All trial balances should have a heading that includes the company name, the words Trial Balance, and the date of the account balances. After the heading you will likely see the following four columns: account number, account title, debit balance amount, and credit balance amount. Most trial balances will not list any account having a balance. As a result, the post-closing trial balance will list only the balance sheet accounts with a balance other than zero. The debit and credit amount columns will be summed and the totals should be identical.

        The post-closing trial balance contains columns for the account number, account description, debit balance, and credit balance. It will likely not contain "Post Closing Trial Balance" in the header, since few accounting computer systems use this designation. Instead, it will use the standard "Trail Balance" report header.

Example of a Post-Closing Trial Balance

Trial Balance

Particulars	Debit	Credit
Cash	105,000
Accounts receivable	320,000
Inventory	500,000
Fixed assets	2,000,000
Accumulated depreciation	480,000
Accounts payable		195,000
Accrued expenses		108,000
Retained earnings		642,000
Common stock		1,500,000
Totals	2,445,000	2,445,000

Journal Entries

A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several recordings, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced". Journal entries can record unique items or recurring items such as depreciation or bond amortization. In accounting software, journal entries are usually entered using a separate module from accounts payable, which typically has its own sub ledger that indirectly affects the general ledger, journal entries directly change the account balances on the general ledger.

Some data commonly included in journal entries are: Journal entry number; batch number; type amount of money, name, auto-reversing; date; accounting period; and description. Typically, accounting software imposes strict limits on the number of characters in the description; a limit of about 30 characters is not uncommon. This allows all the data for a particular transaction in a journal entry to be displayed on one row.

The balance sheet is a statement showing net worth on a particular date. Journal entries are used to record injections and ejections to such net worth. After recording the transactions through journal entries, the revised balance sheet can be prepared.

Suppose the financial position of a company is as follows:

Balance Sheet

 

  Liabilities       Amount              Assets          Amount

  Capital           50,000               Machinery        30,000

  Bank Loan         20,000               Building         25,000

                                         Stock            10,000

                                         Cash              5,000

                    ----                                  ----

                    70,000                                70,000

                    ----                                  ----

Ledger Accounts

Accounting Entries are recorded in ledger accounts. Debit entries are made on the left side of the ledger account whereas Credit entries are made to the right side. Ledger accounts are maintained in respect of every component of the financial statements. Ledger accounts may be divided into two main types: balance sheet ledger accounts and income statement ledger accounts.

Balance Sheet Ledger Accounts

Balance Sheet ledger accounts are maintained in respect of each asset, liability and equity component of the statement of financial position.

Following is an example of a receivable ledger account:

Receivable Account
Debit		$	Credit		$
Balance b/d	1	500	Cash	3	500
Sales	2	1000	Balance c/d	4	1000
		1500			1500

1.  Balance brought down is the opening balance is in respect of the receivable at the start of the accounting period.

2.  These are credit sales made during the period. Receivables account is debited because it has the effect of increasing the receivable asset. The corresponding credit entry is made to the Sales ledger account. The account in which the corresponding entry is made is always shown next to the amount, which in this case is the Sales ledger.

3.  This is the amount of cash received from the debtor. Receiving cash has the effect of reducing the receivable asset and is therefore shown on the credit side. As it can seen, the corresponding debit entry is made in the cash ledger.

4.  This represents the balance due from the debtor at the end of the accounting period. The figure has been arrived by subtracting the amount shown on the credit side from the sum of amounts shown on the debit side. This accounting period's closing balance is being carried forward as the opening balance of the next period.

Similar ledger accounts can be made for other balance sheet components such as payables, inventory, equity capital, non-current assets and so on.

Unadjusted Trial Balance        A trial balance is a list of the balance of ledger accounts of business at specific point of time usually at the end of a period such as month, quarter of year        An unadjusted trial balance is the one which is created before any adjustments are made in the ledger accounts.      The preparation of a trial balance is very simple. All we have to do is to list the balances of the ledger account of business. Unadjusted Trial Balance
Particulars	Debit	Credit
Cash	20,430
Accounts Receivable	5,900
Office Supplies	22,800
Prepaid Rent	36,000
Equipment	80,000
Accounts Payable		5,200
Notes Payable		20,000
Utilities Payable		3,964
Unearned Revenue		4,000
Common Stock		100,000
Service Revenue		82,600
Wages Expense	38,200
Miscellaneous Expense	3,470
Electricity Expense	2,470
Telephone Expense	1,494
Dividend	5,000
Total	215,764	215,764

Adjusting entries

In accounting/accountancy, adjusting entries are journal entries usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred. The revenue recognition principle is the basis of making adjusting entries that pertain to unearned and accrued revenues under accrual-basis accounting. They are sometimes called Balance Day adjustments because they are made on balance day.

Based on the matching principle of accrual accounting, revenues and associated costs are recognized in the same accounting period. However the actual cash may be received or paid at a different time.

What are adjusting entries:

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that the financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.
Sometimes an adjusting entry is needed because:

1.      Revenue has been earned, but it has not yet been recorded.

2.      An expense may have been incurred, but it hasn't yet been recorded.

3.      a company may have paid for six-months of insurance coverage, but the accounting period is only one month.

4.      a customer paid a company in advance of receiving goods or services. Until the goods or services are delivered, the amount is reported as a liability. After the goods or services are delivered, an entry is needed to reduce the liability and to report the revenues.

Adjusted Trial Balance

An Adjusted Trial Balance is a list of the balances of ledger accounts which is created after the preparation of adjusting entries. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities. Adjusted trial balance can be used directly in the preparation of the statement of changes in stockholders' equity, income statement and the balance sheet. However it does not provide enough information for the preparation of the statement of cash flows.

The format of an adjusted trial balance is same as that of unadjusted trial balance.

Example

The following adjusted trial balance was prepared after posting the adjusting entries of Company A to its general ledger and calculating new account balances:

Adjusted Trial Balance
Particulars	Debit	Credit
Cash	20,430	−
Accounts Receivable	5,900	−
Office Supplies	4,320	−
Prepaid Rent	24,000	−
Equipment	80,000	−
Accumulated Depreciation	−	1,100
Accounts Payable	−	5,200
Utilities Payable	−	3,964
Unearned Revenue	−	1,000
Interest Payable	−	150
Notes Payable	−	20,000
Common Stock	−	100,000
Service Revenue	−	85,600
Wages Expense	38,200	−
Supplies Expense	18,480	−
Rent Expense	12,000	−
Miscellaneous Expense	3,470	−
Electricity Expense	2,470	−
Telephone Expense	1,494	−
Depreciation Expense	1,100	−
Interest Expense	150	−
Dividend	5,000	−
Total	217,014	217,014

The totals of an adjusted trial balance must be equal. Any difference indicates that there is some error in the journal entries or in the ledger or in the calculations.

What is an adjusted trial balance:

An adjusted trial balance is a listing of all the account titles and balances contained in the general ledger after the adjusting entries for an accounting period have been posted to the accounts.

              The adjusted trial balance is an internal document and is not a financial statement. The purpose of the adjusted trial balance is to be certain that the total amount of debit balances in the general ledger equals the total amount of credit balances.

Financial Statements

A financial statement or financial report is a formal record of the financial activities of a business, person, or other entity.

Relevant financial information is presented in a structured manner and in a form easy to understand. They typically include basic financial statements, accompanied by a management discussion and analysis.

1.     A balance sheet also referred to as a statement of financial position, reports on a company's assets, liabilities, and ownership equity at a given point in time.

2.     An income statement, also known as a statement of comprehensive income, statement of revenue & expense, P&L or profit and loss report, reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period.

3.     A statement of cash flows reports on a company's cash flow activities, particularly its operating, investing and financing activities.

For large corporations, these statements may be complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

Definition of Financial Statements

Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.

What are Financial Statements:

Financial Statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. Financial Statements reflect the financial effects of business transactions and events on the entity.

Four Types of Financial Statements

1.      Statement of Financial Position

2.      Income Statement

3.      Cash Flow Statement

4.      Statement of Changes in Equity

 

Closing Entries

A journal entry made at the end of the accounting period. The closing entry is used to transfer data in the temporary accounts to the permanent balance sheet or income statement accounts. The purpose of the closing entry is to bring the temporary journal account balances to zero for the next accounting period, which aids in keeping the accounts reconciled.

Closing entries are journal entries made at the end of an accounting period which transfer the balances of temporary accounts to permanent accounts. Closing entries are based on the account balances in an adjusted trial balance.

Temporary accounts include:

1.      Revenue, Income and Gain Accounts

2.      Expense and Loss Accounts

3.      Dividend, Drawings or Withdrawals Accounts

4.      Income Summary Account

The permanent account to which balances are transferred depend upon the type of business. In case of a company, retained earnings account, and in case of a firm or a sole proprietorship, owner's capital account receives the balances of temporary accounts.

Income summary account is a temporary account which facilitates the closing process.

Example

Account	Debit	Credit
Service Revenue	85,600
Income Summary		85,600
Income Summary	77,364
Wages Expense		38,200
Supplies Expense		18,480
Rent Expense		12,000
Miscellaneous Expense		3,470
Electricity Expense		2,470
Telephone Expense		1,494
Depreciation Expense		1,100
Interest Expense		150
Income Summary	8,236
Retained Earnings		8,236
Retained Earnings	5,000
Dividend		5,000