Year-End Accounting: How To Close The Books The Easy Way
Year ends are supposed to be a fun time to enjoy the holidays and spend quality time with the family. But you can’t do that before you wind up the necessary finances. Being the business owner you need to take care of the year-end accounting processes. Closing the accounting books is the top priority before you can even start having a fun time.
The books contain the revenue, expense, and income – the three factors that stabilize the profit or loss in a business. You can put your income to zero (cleaning out) and plug the net profit (or loss) into the final year’s balance sheet. Of course, you need to take the help of functional accounting software and the services of a professional accountant.
But first, let’s begin with the basic question.
What is Meant by Year-End Accounting?
You need to take care of a series of steps to ensure the financial transactions conducted throughout the year are up-to-date. All of these transactions need to be recorded properly. This process takes place to establish the balance, close it and record it in bookkeeping in Dec 2020, as per the standard practice.
This way you can take care of the annual reports and the financial statements. Any errors made need to be taken care of during the bookkeeping.
Note:The year-end period may vary for some businesses instead of the usual January 1 – December 31.
Time to Close the Accounting Books in Easy Steps
Usually, an accountant fulfills the responsibility of closing the books. The process requires the need for professional help so that no errors are recorded. If you are a small business owner you can either go for accounting software or hiring a part-time accountant.
Accounts Affected by Closing Entries
When you are bookkeeping for Dec 2020, three accounts will be influenced by it
These accounts are temporary or nominal accounts (remember the zeroing out). At this point, the accounts aren’t erased but the balance is transferred to the retained earnings.
In either case, you’ll need to follow the steps mentioned down below to ensure all things are being covered in the accounting books.
1. From Journal Entries to General Ledger
The journal entries are the recorded transaction of the year. That’s where you need to begin collecting the information. These transactions are transferred to General Ledger posted into an account like Accounts Receivable (A/R).
Post the account’s total derived from the cash payments, sales, and cash receipts journal. The cash payments are the “cash disbursement” that also includes electronic transfers. Being a small business, you can even close the books monthly if you want to. You can make selective entries in the bookkeeping.
2. Sum of the General Ledger Accounts
Keep the invoices up to date so that you don’t lose any transaction. You need to add up all the transactions into the general ledger account. In case your customers haven’t paid yet, follow up with them. If you are using the accounting software you will get the email invoice reminder.
3. Preliminary Trial Balance
Now you need to make the sum of all the preliminary ending balances.
A trial balance is a report that includes all the credits and debits. The total number of credits should be the same as the total number of debits. If they are not balanced you need to go through the statement again.
4. Adjust the Journal Entries
In case you missed out on a few transactions on particular dates, you need to adjust them too. These can be accumulation (accrual) related to real estate taxes or depreciation. Record them so that you can close the book.
The adjustments will be made in the general journal.
5. Adjusted Trial Balance
After the adjusting entries, you need to make a sum of your general ledger accounts.
Add the entries and then you will be able to generate a new trial balance sheet. This way you can make sure your debits and credit side of the sheet are equal.
During the making of the adjusted trial balance, if both sides still are not equal, revise the adjusted transactions.
6. Create Financial Statements
In the case your debit and credit side is the same in the trial balance, now you will move ahead with the balance sheet and income statement a.k.a “profit and loss statement”. By using accounting software you can generate the statement.
Also using the accounting software also allows you to overview the business’s financial position at the end of the accounting period. The statement can be made if you are closing the accounting books on either a monthly basis or yearly basis.
7. Closing Entries
Closing entries occur when the revenue and expense accounts are zeroed by using the journal entries. Because of the closing entries, the balance is then transferred from the temporary accounts to the permanent accounts.
8. Final Trial Balance
At the end of the process of bookkeeping in Dec 2020, now the only remaining report is to generate the final trial balance. It consists only of the balance sheet accounts. In this statement, the debit and credit side also must be balanced.
In The Year’s End
Closing the accounting books is the common and standard practice you need to follow as a responsible business owner. In case you have additional questions to ask, you can always consult My Count Solutions.