Question

a) What does the Postclosing Trial Balance represent? What is included in it and why is it important?

b) What are the temporary accounts and why are they closed each period?

c) Describe the closing entries and prepare them in proper form?

d) Identify the steps in the accounting cycle.

Answer 1

a)

The post closing trial balance shows the ending balances that should be required to prepare the year end balance sheet.

It is included all the real accounts after excluding all the temporary accounts which are closed and it is important because it is the ending statement which shows the final balances of all the real accounts where based on those balances, the year end balance sheet is prepared. As balance sheet is one of the top most important statement which shows the financial position of a company till that period.

b)

All revenue accounts like sales revenue account, service revenue account, rent revenue account etc. and all expenses accounts like salaries expense account, depreciation expense account, all selling and administration accounts, dividends account etc. are the examples of temporary accounts which are based on particular period where each of these accounts are opened at the beginning of the period and all the related transactions are journalized and posted to each respective ledger accounts and adjustments are made before the year end and finally each account is closed in order to transfer their respective balances to its relevant accounts in order to prepare the year end financial statements like Balance Sheet.

c)

Closing entreies are prepared in order to close all the operating accounts like all revenue accounts and all expenses accounts as stated above because these are temporary accounts and their existence of each account is not required to appear on the balane sheet but their effect on the real accounts is required. Each of the temporary account is closed to one final account called Income Summary account and finally its balance is transferred to Retained earnings account.

For example, the sales revenue account always has credit balance so it is closed to income summary account by debiting the sales revenue account and crediting the income summary account.

Similarly, expenses accounts always has debit balance so it is closed to income summary account by crediting all the expenses accounts and debiting the income summary account.

The net effect is called the net income when revenues are more than the expenses or net loss when the expenses are more than the revenues. The net income or net loss is transferred to retained earnings in order to show the balance of retained earnings along with current year earnings.

d)

Steps of Accounting Cycle:

1) Transactions

2) Journal Entries

3) Posting each journal entry to respective ledger accounts

4) Preparing the Unadjusted Trial Balance

5) Recording adjusting entries to record the year end adjustments

6) Preparing the Adjusted Trial Balance

7) Preparing the Income Statement

8) Preparing the Cash Flows Statements and Statement of Stockholders' Equity

9) Recoding the Closing Entries to close each temporary accounts

10) Preparing the Balance Sheet