What Does Closing The Books in Accounting Mean?

Notice that the balances in interest revenue and service revenueare now zero and are ready to accumulate revenues in the nextperiod. The Income Summary account has a credit balance of $10,240(the revenue sum). Adjusting entries record items that aren’t noted in daily transactions. These items include accumulation (known as “accrual” in accounting) of real estate taxes or depreciation accrual, which need to be recorded to close the books. A net loss would decrease retained earnings so wewould do the opposite in this journal entry by debiting RetainedEarnings and crediting Income Summary.

This adds extra layers of protection and accountability to show the books are correct and in order. For example, a company would ensure that its expenses and income transactions are accurate on a monthly basis and then conduct a quarterly review ahead of an important meeting with the board or investors. After the closing entries have been posted, the Service Revenue and Interest Revenue accounts (in T-account format) of MicroTrain appear as follows. The income statementsummarizes your income, as does income summary. If both summarizeyour income in the same period, then they must be equal.

What Does Accounting Closing Process Mean?

The records are used to generate reports that tell an owner how much money flows in and out of their business. Businesses often use professional bookkeeping services to ensure they are on track financially, are tax-season ready, and are able to continue to grow and thrive. Get started here if you want to speak to a professional about your business cash flow. Journal entries are transferred to the general ledger when they’re posted to an account, such as accounts receivable.

• Expense accounts may include rent, salary, utilities, and advertising.
• These posted entries will then translate into apost-closing trial balance, which is a trialbalance that is prepared after all of the closing entries have beenrecorded.
• Remember, dividends are a contra stockholders’ equity account.It is contra to retained earnings.
• The money you have should align with the money listed on these statements.
• Meeting the accounting standards and regulations as expected can be time-consuming.

At the end of the year in the old paper-based accounting system, the journal would be put in a safe and a new journal started (often businesses had so many transactions they had multiple huge journals). Obviously, with our computer data storage systems, we just keep adding journal entries to our digital files. By the same token, the ledgers by the end of the year were full of entries and cumbersome, to say the least, so we closed them, both literally and figuratively. We got a new ledger with all blank pages, and with some permanent accounts, such as our checking account, we brought the ending balance from the old book forward, and that balance became the beginning balance in our new book. But there are other accounts, like the revenue and expense accounts, that we want to track only for one year. We call those temporary accounts, and when we start our new book, we just start accumulating those amounts from zero.

How to Prepare Closing Entries

The amounts in the post-closing trial balance are from the ledger after the closing entries have been posted. Look at Exhibit 24, a post-closing trial balance for MicroTrain Company as of 2010 December 31. 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.

But these time constraints can lead to rushed work and human error. These reports will provide the most up-to-date transactions and details of your startup’s financial health. As one of your last steps, run the financial reports your colleagues in other departments need to form strategies and make decisions.

Financial Accounting

The balance of these accounts will roll over into the next period, so they don’t need to be closed. The ending balance for these accounts will be the same as the beginning balance for the next period. Finally, you may need to record some journal the closing process is sometimes referred to as closing the books entries to properly close your books. The books are typically developed by an accounting professional and then reviewed by the business owner or executive. Once this person signs off on their accuracy, then they can be considered closed.

To update the balance in the owner’s capital account, accountants close revenue, expense, and drawing accounts at the end of each fiscal year or, occasionally, at the end of each accounting period. For this reason, these types of accounts are called temporary or nominal accounts. When an accountant closes an account, the account balance returns to zero. Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next.

When you debit Service Revenue and Interest Revenue, credit Income Summary (Account No. 600). Enter the account numbers in the Posting Reference column when the journal entry has been posted to the ledger. The closing entries are the journal entry formof the Statement of Retained Earnings. The goal is to make theposted balance of the retained earnings account match what wereported on the statement of retained earnings and start the nextperiod with a zero balance for all temporary accounts.