Introduction to Closing the Books Financial Accounting

As such, one could request financial results for most any period of time (e.g., the 45 days ending October 15, 20XX), even if it related to a period several years ago. In these cases, the notion of closing the accounts becomes far less relevant. Very simply, the computer can mine all transaction data and pull out the accounts and amounts the closing process is sometimes referred to as closing the books that relate to virtually any requested interval of time. These finalized reports show a business’s financial position over a certain accounting period—whether a month or an entire year. It’s easier to make adjustments to journal entries when you use accounting software with connections to expert bookkeepers and tax prep services.

• The closing entries are the journal entry formof the Statement of Retained Earnings.
• Closing or transferring the balance in the Income Summary account to the Retained Earnings account results in a zero balance in Income Summary.
• Regularly closing your books will prevent unwanted changes from occurring to your accounting data after you generate important financial reports for your accountant or tax professional.
• If there is a discrepancy, it will be your finance team’s job to identify and confirm the cause.
• But these time constraints can lead to rushed work and human error.
• To get a zero balance in the Income Summaryaccount, there are guidelines to consider.

Nomatter which way you choose to close, the same final balance is inretained earnings. However, there is still a closing process that prevents the accountants and bookkeepers from accidentally posting entries to the prior period. The closing process means any books and records that produced the official financial statements are “closed” to any further entries that would cause them to no longer match the published financials. When you close your books at year-end, the accounts aren’t erased; instead, their balances are transferred to a permanent retained earnings account. Occasionally, revenue and expenses are transferred to an intermediate account called an income summary. “The books” are a business’s revenue, expense, and income summary reports.

Temporary and Permanent Accounts

In a partnership, separate entries are made to close each partner’s drawing account to his or her own capital account. If a corporation has more than one class of stock and uses dividend accounts to record dividend payments to investors, it usually uses a separate dividend account for each class. If this is the case, the corporation’s accounting department makes a compound entry to close each dividend account to the retained earnings account.

As you try to close the books on all these accounts simultaneously, your time constraints and pressures are multiplied. As you sort out any discrepancies, you’ll document any changes by adjusting journal entries. This is where you record any financial updates, such as a late bill that arrived and other updated accounts receivable. But infrequent reconciliations, such as at the end of each month, can lead to some common challenges for finance departments. Consider the step-by-step requirements of closing the books and how you can tweak these for a reconciliation process that better serves your startup’s needs. This can mean the rendering of the service and the payment of the bill end up occurring during 2 different accounting periods.

8: Closing Entries

Simply put, closing the books means ensuring that every transaction or expense is recorded and all of the information that a bookkeeper needs to put together their reports—like income statements and balance sheets—is present. This chapter will explain the steps required to complete the accounting cycle. This includes understanding the full accounting information cycle, and what is used to create the financial statements that will be provided to required and interested stakeholders. On a quartery and annual basis, financial statements are created for outside stakeholders as well.