Which of the following correctly describes the accounts reported on the post-closing trial balance?
A. It includes permanent and temporary accounts with non-zero balances.
B. The ending retained earnings balance includes the current period net income.
C. It includes only temporary account balances.
D. It doesn’t include stockholders’ equity account balances.
The correct answer and explanation is :
The correct answer is B. The ending retained earnings balance includes the current period net income.
Explanation:
A post-closing trial balance is prepared after all the closing entries have been made at the end of an accounting period. The purpose of this trial balance is to ensure that all temporary accounts (such as revenues, expenses, and dividends) have been closed and that the accounting equation remains in balance. Here’s a breakdown of why B is the correct choice:
- Temporary and Permanent Accounts: The post-closing trial balance only includes permanent accounts (also called real accounts) and their balances. These accounts are those that carry over from one period to the next, such as assets, liabilities, and stockholders’ equity accounts. On the other hand, temporary accounts (such as revenues, expenses, and dividends) are closed to zero at the end of the period and are not included in the post-closing trial balance.
- Ending Retained Earnings: After closing the income statement accounts (revenues and expenses) into Retained Earnings, the ending balance of Retained Earnings in the post-closing trial balance reflects the cumulative results of the company’s operations, including net income for the period. The current period’s net income is transferred to Retained Earnings as part of the closing entries, increasing or decreasing its balance.
- Verification of Permanent Accounts: The purpose of the post-closing trial balance is to verify that the balances of the permanent accounts are correct and that debits equal credits after all closing entries are posted.
Let’s briefly evaluate the incorrect options:
- A: The post-closing trial balance does not include temporary accounts, as they are closed to permanent accounts like Retained Earnings.
- C: It doesn’t include temporary account balances, as temporary accounts are closed during the closing process.
- D: The post-closing trial balance does include stockholders’ equity accounts, such as common stock and retained earnings.
Therefore, option B is the correct description of the post-closing trial balance.