Closing The Books
Closing the Bookkeeping Books
Closing the bookkeeping books is a crucial process in accounting that involves finalizing all financial transactions for a specific period, typically at the end of a month, quarter, or year. This process ensures that all revenue and expenses are accurately recorded and that the financial statements reflect the true financial position of the business.
Here’s a detailed step-by-step guide on how to close the bookkeeping books effectively:
Transfer (post) Journal Entries to the General Ledger
The first step in closing your books is to ensure that all journal entries have been accurately posted to the general ledger.
Sum the General Ledger Accounts
Once all entries are posted, sum up each account in the general ledger to determine preliminary ending balances. This involves adding together all debits and credits for each account type (assets, liabilities, equity, revenues, and expenses).
Review and reconcile accounts: Before closing the books, it's crucial to review and reconcile all accounts, including bank accounts, accounts receivable, accounts payable, and any other balance sheet and income statement accounts. This ensures that all transactions are recorded accurately and any discrepancies are resolved.
Prepare a Preliminary Trial Balance
After summing up the accounts, create a preliminary trial balance by listing all account balances from the general ledger. The total debits should equal total credits, if not find and correct the errors.
Enter Adjusting Journal Entries
Make any necessary adjusting journal entries for items not recorded using regular transactions such as depreciation, accrued expenses, and unbilled income. Adjusting entries ensure that all financial activities are matched with the the correct reporting period.
Make an Adjusted Trial Balance
After entering adjusting entries, prepare an adjusted trial balance that include the adjusting entries made. Again, confirm that total debits equal total credits.
Prepare Financial Statements:
Income Statement
Owner's Equity Statement
Balance Sheet
Cash Flow Statement
Close Temporary Accounts
Close revenue and expense accounts: To close the books, revenue and expense accounts are closed to a temporary account called the Income Summary. This is done by transferring the balances of these accounts to the income summary account. This step resets the revenue and expense accounts to zero for the next accounting period.
Close the Income Summary account: After transferring the balances of revenue and expense accounts to the income summary account, the income summary account is closed to a capital or retained earnings account. This step summarizes the net income or loss for the period and updates the capital or retained earnings account.
Close Draw or Dividend account: The draw or dividend account is closed to the capital or retained earnings account. This step reflects any draws or dividends paid to owners during the period and updates the capital or retained earnings account accordingly.
Prepare post-closing trial balance: After closing the books, prepare a post-closing trial balance. This trial balance includes only permanent or balance sheet accounts and ensures that the books
are in balance after the closing entries are made.
By following these steps, you can successfully close the books in accounting and prepare accurate financial statements for the accounting period. Remember to keep detailed records and
documentation of the closing process for future reference and audit purposes.
Closing The Books Video
Additional Closing The Books Video