Closing the Books
When you reach the end of an accounting period, you need to "close the
books." At a minimum, you will close your books annually because you have
to file an income tax return every year. If you are having financial statements
prepared, you will want them done at least annually. However, annual financial
statements may not be enough to help you keep tabs on your business. You may
want financial statements monthly, bi-monthly, or quarterly.
Even if you are not having financial statements prepared, you may want to
close your books monthly. Sending out customer statements, paying your
suppliers, reconciling your bank statement, and submitting sales tax reports to
the state are probably some of the tasks you need to do every month. You may
find it easier to do these if you close your books.
How to close your books. After you finish entering the day-to-day
transactions in your journals, you are ready to "close the books" for
the period. A step-by-step description of how to close the books follows. How
many of the steps you do yourself depends on how much of the accounting you want
to do, and how much you want to pay your accountant to do.
entries to the general ledger. Transfer the account totals from your
and cash receipts journal and cash
disbursements journal) to your general
- Total the general ledger accounts. By footing
the general ledger accounts, you will arrive at a preliminary ending balance
for each account.
a preliminary trial balance. Add all of the general ledger account
ending balances together. Total debits
should equal total credits.
This will help assure you that your accounts balance prior to making
adjusting journal entries. Certain end-of-period adjustments must
be made before you can close your books. Adjusting entries are required to
account for items that don't get recorded in your daily transactions. In a
traditional accounting system, adjusting entries are made in a general
- Foot the general ledger accounts again. This will give you the
adjusted balance of each general ledger account.
- Prepare an adjusted trial balance. Prepare another trial balance,
using the adjusted balances of each general ledger account. Again, total
debits must equal total credits.
financial statements. After tracking down and correcting any
trial balance errors, you (or your accountant) are ready to prepare a balance
sheet and income
closing entries. Get your general ledger ready for the next
accounting period by clearing out the revenue and expense accounts and
transferring the net income or loss to owner's
equity. This is done by preparing journal entries that are called
closing entries in a general journal.
- Prepare a post-closing trial balance. After you make closing
entries, all revenue and expense accounts will have a zero balance. Prepare
one more trial balance. Since all revenue and expense accounts have been
closed out to zero, this trial balance will only contain balance sheet
accounts. Remember that the total debit balance must equal the total credit
balance. This will help ensure that all general ledger account balances are
correct as of the beginning of the new accounting period.