BAF3M-U4-L04 · BAF3M
Closing and the post-closing trial balance
Learning goals
- Distinguish temporary and permanent accounts.
- Prepare closing entries using Income Summary.
- Calculate ending capital through the closing trail.
- Prepare and interpret a post-closing trial balance.
Prerequisite check
From the Paper Trail worksheet, state Service Revenue, total expenses, net income, Drawings, and beginning Capital.
Vocabulary
- Temporary account: revenue, expense, and drawings account reset for a new period.
- Permanent account: asset, liability, and capital account carried forward.
- Closing entry: period-end entry that transfers temporary balances to capital and resets them to zero.
- Income Summary: temporary clearing account used in a common closing method.
- Post-closing trial balance: list of permanent ledger balances after closing.
- Accounting cycle: evidence, analysis, journal, posting, trial balance, adjustments, statements, closing, and post-closing check.
Core idea
Closing does not erase history. It resets period counters so the next income statement measures only the next period. Permanent balances continue because resources, obligations, and ending capital exist across the year boundary.
Why this treatment makes sense
If Revenue stayed open, next year's statement would include this year's earnings. If Drawings stayed open, next year's owner withdrawals would be mixed with this year's. Closing transfers the period's net effect to Capital, the permanent equity account.
A repeatable method
Using Income Summary:
- Close revenue: debit each revenue; credit Income Summary.
- Close expenses: debit Income Summary; credit each expense.
- Close Income Summary: net credit means net income, so debit it and credit Capital; reverse for net loss.
- Close Drawings: debit Capital; credit Drawings.
- Confirm temporary accounts are zero.
- Prepare the post-closing trial balance from permanent balances only.
Worked example
Paper Trail Studio has Service Revenue $7,800 Cr; expenses of Rent $1,200 Dr, Wages $500 Dr, Supplies $650 Dr, and Insurance $300 Dr; Drawings $600 Dr; Capital $14,000 Cr.
Closing entries:
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | $7,800 | — |
| Income Summary | — | $7,800 |
| Income Summary | 2,650 | — |
| Rent Expense | — | 1,200 |
| Wages Expense | — | 500 |
| Supplies Expense | — | 650 |
| Insurance Expense | — | 300 |
| Income Summary | 5,150 | — |
| Owner, Capital | — | 5,150 |
| Owner, Capital | 600 | — |
| Owner, Drawings | — | 600 |
Ending Capital = $14,000 + $5,150 − $600 = $18,550 Cr.
Post-closing trial balance:
| Account | Debit | Credit |
|---|---|---|
| Cash | $9,000 | — |
| Accounts Receivable | 2,400 | — |
| Supplies | 250 | — |
| Prepaid Insurance | 900 | — |
| Equipment | 8,000 | — |
| Accounts Payable | — | $1,500 |
| Unearned Revenue | — | 500 |
| Owner, Capital | — | 18,550 |
| Totals | $20,550 | $20,550 |
No revenue, expense, Drawings, or Income Summary account belongs here.
Journal, ledger, and statement connection
Adjusted balances produce statements first. Closing entries then post to the ledger. The post-closing trial balance proves permanent debit-credit equality and becomes the starting ledger position for the next period. Statements should never be prepared from post-closing temporary balances because they are zero.
Common mistakes
- Closing assets or liabilities.
- Closing Capital to zero.
- Closing before preparing adjusted statements.
- Crediting Income Summary for expenses instead of debiting it.
- Treating Drawings as an expense or closing it through net income.
- Including temporary accounts in the post-closing trial balance.
Guided practice
Close Revenue $13,000 Cr; Wages Expense $5,200 Dr; Rent Expense $2,400 Dr; Utilities Expense $900 Dr; Drawings $1,100 Dr. Beginning Capital is $20,000 Cr. Find net income and ending capital.
Independent practice
A business has Fees Earned $8,500 Cr, total expenses $9,300 Dr, Drawings $700 Dr, and beginning Capital $12,000 Cr.
- Identify net income or loss.
- State the direction of each closing entry.
- Calculate ending capital.
- Explain how the loss appears through Income Summary.
Self-check and solutions
Guided practice: Expenses = $8,500; net income = $13,000 − $8,500 = $4,500. Close Revenue with Dr Revenue/Cr Income Summary $13,000; close expenses with Dr Income Summary/Cr expenses $8,500; close net income with Dr Income Summary/Cr Capital $4,500; close drawings with Dr Capital/Cr Drawings $1,100. Ending Capital = $20,000 + $4,500 − $1,100 = $23,400 Cr.
Independent practice: Net loss = $9,300 − $8,500 = $800. After revenue and expense closing, Income Summary has an $800 debit. Close it with Dr Capital $800 / Cr Income Summary $800. Close drawings Dr Capital $700 / Cr Drawings $700. Ending Capital = $12,000 − $800 − $700 = $10,500 Cr.
Retrieval practice
Sort these into temporary and permanent: Cash, A/R, A/P, Revenue, every Expense, Drawings, Capital, Accumulated Depreciation, Unearned Revenue, Income Summary.
Exam-style application
After closing, Service Revenue still has a $4,000 credit and Income Summary has a $4,000 credit. The revenue closing entry was posted to Income Summary but not Service Revenue. Diagnose the effect and repair.
Answer outline: One side of Dr Service Revenue/Cr Income Summary was omitted, so Income Summary was credited without zeroing Revenue and the ledger would be out of balance by $4,000. Post the missing $4,000 debit to Service Revenue with a correction reference, then continue only after verifying all closing postings. Do not close Income Summary twice.
Lesson summary
Closing transfers period performance and drawings to permanent capital, resets temporary accounts, and leaves a post-closing trial balance ready for the next period.