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.

  1. Post entries to the general ledger. Transfer the account totals from your journals (sales and cash receipts journal and cash disbursements journal) to your general ledger accounts.
  2. Total the general ledger accounts. By footing the general ledger accounts, you will arrive at a preliminary ending balance for each account.
  3. Prepare 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 entries.
  4. Prepare 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 journal.
  5. Foot the general ledger accounts again. This will give you the adjusted balance of each general ledger account.
  6. 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.
  7. Prepare financial statements. After tracking down and correcting any trial balance errors, you (or your accountant) are ready to prepare a balance sheet and income statement.
  8. Prepare 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.
  9. 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.