Closing The Books

What does it mean to Close the Books?

Closing the books refers to the process of finalizing the financial records for a specific accounting period, such as a month, quarter, or year. It involves completing various tasks to ensure the accuracy and completeness of financial statements and preparing for the next accounting period.

By closing the books, businesses ensure the accuracy of their financial records, comply with accounting standards and regulations, and provide stakeholders with reliable and meaningful financial information.

Why is it important to close the books?

Closing the books is important to maintain accurate financial records, comply with regulations, assess performance, facilitate decision-making, and provide reliable financial information to stakeholders.

1. Accuracy and Completeness: Closing the books ensures that financial records are accurate and complete for a specific accounting period. It allows for the proper recognition of revenues, expenses, assets, and liabilities, providing a reliable snapshot of the company's financial position.
2. Financial Reporting: Closing the books enables the preparation of accurate financial statements, such as the income statement, balance sheet, and cash flow statement. These statements are crucial for internal decision-making, external reporting to stakeholders, and compliance with regulatory requirements.
3. Compliance and Regulations: Closing the books helps ensure compliance with accounting standards, regulations, and tax laws. It allows businesses to accurately calculate and report taxes, meet filing deadlines, and fulfill their obligations to regulatory bodies.
4. Performance Evaluation: Closing the books provides a clear assessment of the company's financial performance for the accounting period. It allows for the analysis of revenues, expenses, and profitability, helping management and stakeholders evaluate the business's financial health and make informed decisions.
5. Planning and Forecasting: By closing the books, businesses can use historical financial data to forecast future performance and plan for the next accounting period. It enables budgeting, setting financial goals, and making strategic decisions based on reliable information.
6. Audit and Compliance Auditing: Closing the books prepares the company for audits and ensures that financial records are organized, complete, and ready for review by external auditors. It enhances transparency, reduces the risk of errors or fraud, and provides assurance to stakeholders regarding the integrity of the financial information.
7. Starting Fresh for the Next Period: Closing the books creates a clean slate for the next accounting period. By closing temporary accounts and transferring balances to retained earnings or income summary, businesses can accurately track revenues and expenses in the upcoming period without confusion or overlap.

10 steps involved in closing the books

Here are some typical steps involved in closing the books at the end of an accounting period:

1. Accrue expenses - Adjust accounts for expenses incurred but not yet paid, like utilities, salaries, etc. This matches expenses with the period they relate to.
2. Adjust revenue accounts - Make sure revenue is recorded in the appropriate period based on timing of sale or service, not cash receipt. May involve accruing sales or deferring revenue.
3. Reconcile bank accounts - Ensure cash balances in books match bank statements after clearing any outstanding checks/deposits.
4. Prepare adjusting journal entries - Record accruals, deferrals, and other adjustments identified during reconciliation and analysis.
5. Prepare financial statements - Generate trial balance, income statement, balance sheet, statement of cash flows and other required reports.
6. Close revenue and expense accounts - Zero out temporary revenue/expense accounts and transfer balances to retained earnings.
7. Perform inventory adjustments - Adjust inventory accounts to reflect physical counts at period end.
8. Review financials with management - Discuss results, identify any issues, and get sign-off on statements.
9. File tax returns - Prepare returns and files based on information from closed books.
10.  Begin new accounting period - Roll over account balances from prior period to new books.

How often should the books be closed?

The larger and more complex the business, the more frequent the need to close books - usually monthly or quarterly. More frequent closing provides better visibility into financial performance. However, smaller businesses can often get by with just annual closings to reduce accounting workload. Most companies aim to close within 20-30 days after a period ends to facilitate reporting and analysis.

• Monthly closing: Many businesses, especially smaller ones, close their books each month to closely monitor cash flow and profits on a periodic basis. Monthly closing also makes tax payments and financial reporting easier.

• Quarterly closing: Public companies and many larger private businesses close their books at the end of each fiscal quarter (March, June, September, December). This allows them to track results each quarter and report to shareholders.

• Annual closing: Some smaller private companies only do a full fiscal year-end closing of books annually. While less frequent monitoring, annual closing simplifies the accounting process throughout the year.

How Accounting Automation helps in closing the books?

Accounting automation streamlines data collection, reconciliation, adjustments and report generation, significantly reducing book closing time from weeks to days. It ensures accuracy and compliance too.

Here are some ways accounting automation helps in closing the books:

1. Automatic transaction recording: Tools can automatically capture invoices, bills, payments, etc. from bank feeds and ERP systems. This eliminates manual data entry.
2. Real-time reconciliation: Cloud accounting software continuously reconciles bank, credit card and other accounts in real-time. This makes period-end book closing faster.
3. Automated accruals: Some tools can automatically accrue expenses like payroll, utilities etc. based on pre-defined accrual rules and schedules.
4. Revenue recognition assist: Automation helps defer or recognize revenue according to accounting standards based on contracts and billing milestones.
5. Integrated reporting: Automated reports like trial balance, income statements are generated at the push of a button from up-to-date accounting data.
6. Real-time analytics: Dashboards provide on-demand insights into key metrics like cash flow, profits without rebuilding reports.
7. Audit trails: Full transaction histories and audit logs simplify yearly audits by providing instant transaction evidence.
8. Complex calculations: Tools handle complex calculations for inventory, assets etc. reducing manual errors.
9. Workflow automation: Closing checklists and approval workflows ensure uniform and timely book closing each period.