Clip’em Cliff’s post-closing trial balance is presented in Figure 5.27. The unadjusted trial balance shows a debit and credit balance of $87,900. Remember, the unadjusted trial balance is prepared before any period-end adjustments are made. You own a landscaping business that has just begun operations. You made several expensive equipment purchases in your first month to get your business started.

Using Liquidity Ratios to Evaluate Financial Performance

He obtains a barber’s license after the required training and is ready to open his shop on August 1. Table 5.2 shows his transactions from the first month of business. We next take a look at a comprehensive example that works through the entire accounting cycle for Clip’em Cliff. Clifford Girard retired from the US Marine Corps after 20 years of active duty. The summary of adjusting journal entries for Clip’em Cliff is presented in Figure 5.19. The income statement for Clip’em Cliff is shown in Figure 5.23.

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• The final debit or credit balance in each account is transferred to the unadjusted trial balance in the corresponding debit or credit column as illustrated in Figure 5.17.
• Dividends, net income (loss), and retained earnings balances go on the statement of retained earnings.
• To close dividends, Cliff will credit Dividends, and debit Retained Earnings.
• You will notice that the sum of the asset account balances in Cliff’s ledger equals the sum of the liability and equity account balances at $83,075.
• To prepare your financial statements, you want to work with your adjusted trial balance.
• Once all journal entries have been created, the next step in the accounting cycle is to post journal information to the ledger.

These purchases very much reduced your cash-on-hand, and in turn your liquidity suffered in the following months with a low working capital and current ratio. Once all of the closing entries are journalized, Cliff will post this information to the ledger. The closed accounts with their final balances, as well as Retained Earnings, are presented in Figure 5.26.

4 Appendix: Complete a Comprehensive Accounting Cycle for a Business

Once all of the account balances are transferred to the correct columns, each column is totaled. The total in the debit column must match the total in the credit column to remain balanced. The unadjusted trial balance for Clip’em Cliff appears in Figure 5.18. The last step for the month of August is step 9, preparing the post-closing trial balance. The post-closing trial balance should only contain permanent account information.

Reversing Entries

You will notice that the sum of the asset account balances in Cliff’s ledger equals the sum of the liability and equity account balances at $83,075. The final debit or credit balance in each account is transferred to the unadjusted trial balance in the corresponding debit or credit column as illustrated in Figure 5.17. The balance sheet shows total assets of $80,875, which equals total liabilities and equity. Now that the financial statements are complete, Cliff will go to the next step in the accounting cycle, preparing and posting closing entries. To do this, Cliff needs his adjusted trial balance information.

The adjusted trial balance shows a debit and credit balance of $94,150. Once the adjusted trial balance is prepared, Cliff can prepare his financial statements (step 7 in the cycle). debit balance definition We only prepare the income statement, statement of retained earnings, and the balance sheet. The statement of cash flows is discussed in detail in Statement of Cash Flows.

Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Clip’em Cliff’s ledger represented by T-accounts is presented in Figure 5.16. His consulting practice will be recognized as service revenue and will provide additional revenue while he develops his barbering practice. Cliff then prepares the balance sheet for Clip’em Cliff as shown in Figure 5.25.

To find the balance, take the difference between the income summary amount in the first and second entries (10,650 – 10,625). To close income summary, Cliff would debit Income Summary and credit Retained Earnings. To close expenses, Cliff will credit expense accounts and debit income summary. The beginning retained earnings balance is zero because Cliff just began operations and does not have a balance to carry over to a future period. It might make sense for Cliff to not pay dividends until he increases his net income.