Why Do the Accountants Close the Books?
When you hear the phrase “close the books”, the first thing that appears in your mind is probably the action of closing an opened-up book on your table. However, in accounting (Also What are Accounting Adjustments?), this is not the case. The terms “books” refers to the records the company has made for the business transaction occurred. Business owners (Also see When Will Business Owners Issue Debit Notes?) may use these records to prepare reports that help them understand the sum of cash inflows and cash outflows of their company.
When business owners hire an accounting firm in Johor Bahru to let the accountants close the books for them, it means that the accountants will finalise the reports. The accountants will clear the ending balances of the company’s income and expense accounts before moving the net profit or loss to its balance sheet. These reports will present the financial (Also see Who Needs the Financial Statements?) position of the company throughout an accounting period.
It seems like the process of closing the books is an additional work the accountants have to do at the end of an accounting period. So, why do they close the books? The main purpose of doing so is to ensure that the income earned, or expenses (Also see An Overview of Deferred Expenses) incurred in the current accounting period will not be brought forward to the next period as this will cause the accuracy of the amounts to drop.
Business owners should close their books of accounts every year as this allows the company to generate financial statements. These statements would be helpful for them to understand the financial position of their business. Typically, they need to prepare financial statements like the balance sheet, cash flow statement, as well as the profit and loss statement at the end of the accounting period so that they get to know about the company’s financials and plan for the next period.
Besides, closing the books is vital for taxation purposes too. Companies need to close the books at the end of an accounting period so that they can file their income tax returns properly. In some companies, business owners may choose to close their books every month too. This is because doing so will ease the process of bank reconciliation, making payments to the suppliers, issuing invoices to the customers, and so on.
The closing entries that the accountants have created will affect the company’s dividend accounts, revenue accounts, as well as the expense accounts. People often call these accounts as temporary accounts as the accountants will take their balances out, making their balances to become zero. The closing entries serve to clear the amounts in these accounts to prevent them from affecting the next accounting period. Then, the accountants will transfer the balances of these temporary accounts into the company’s retained earnings.