How Do the Accountants Close the Books?
In accounting, closing the books means that the accountants will remove all the balances from the income and expense accounts and move the net profit or net loss into the company’s balance sheet. This is a crucial process that every business should carry out because if business owners do not do so, they will not be able to determine the performance and financial position of their company in that year.
Typically, an accountant will be the one who will perform the process of closing the books. However, if you run a small business, you can choose to complete this task with the help of accounting software. Small companies tend to have fewer transactions; therefore, the closing process will be relatively easy too. Thanks to the development of technology, the accounting software can automate some of the steps in this process.
Still, some business owners who do not have time for the accounting tasks will choose to hire an in-house accountant or an accounting firm in Johor Bahru and let them close the books for them. If you are one of them, you still need to know the basic steps of the process so that you get to know what to expect from the accountants. The article below is going to shed light on the process of closing the books, which applies double-entry accounting.
When you want to start the process, the first thing that you should do is to transfer all the journal entries into the company’s general ledger. This means that you need to post the sum of the cash payment as well as the cash receipt journals to the right general ledger account. Then, add up the transactions in all your general ledger account such as the accounts payable account, accounts receivable account and so on. The amount calculated will be the preliminary ending balances for all your accounts.
The next step is to generate a preliminary trial balance by summing up all the preliminary ending balances that you have calculated in the second step. The trial balance serves to show the sum of all debits (Also see When Will Business Owners Issue Debit Notes?) and credits of your company. In this stage, you need to make sure that the sum of debits and credits are the same. If you are unable to arrive at the same amount, you need to recheck the amounts. If the numbers tally, you can move to the next step, that is to enter the adjusting journal entries.
Adjusting entries serve to record items that you will not record in your daily business transactions. Some of the examples include accruals and the accumulated depreciation. You should record these items in your general journal. Then, calculate the sum of the general ledger accounts again to include the adjusted entries that you have added just now. To produce a new trial balance, you need to sum them up. Again, you need to make sure that the amounts of debits and credits are the same.
Now, you already have all you need to generate your company’s (Also see Changing from Unlimited Companies to Limited Companies) balance sheet and profit and loss statement. The accounting software can help you with this as it can generate these financial statements automatically for you. Both the statements can provide you with a clear picture of your company’s financial position for that accounting period. After that, you need to use the closing entries to make the balances in your revenue and expense (Also see How Do Provisions and Accrued Expenses Differ from Each Other?) accounts to be zero. The function of these entries is to transfer the balances in the temporary accounts into the permanent accounts.
Finally, do not forget to generate the final trial balance. It will only contain balance sheet accounts as you have moved the ending balances of your revenue and expense accounts into the permanent accounts. Similar to the previous steps, the sum of debits and credits should be the same. If they can match each other, it means that the balances of your general ledger accounts are all correct.