Closing the accounting books is an important and necessary function for maintaining the integrity of accounting data. Before the accounting books are closed for the month, a thorough review of all financial information should be performed. All businesses need a written set of closing procedures in order to ensure compliance with company policies and to assist in training new personnel.
Prepare Journal Entries
All daily accounting activity for the month posts to the general ledger. The general ledger is a complete listing of every asset, liability, equity, income and expense account for a business. Journal entries are a posting method used to record accounting data that is not posted to the general ledger through accounts receivable or accounts payable. If your business practices accrual accounting, journal entries might include real estate tax accrual, insurance amortization and posting depreciation. Also, if an accrual-based business incurs expenses during the month but has not yet received the invoice for processing, journal entry those expenses in order to reflect the proper operating costs in the appropriate period.
An income statement is a detailed report listing all income for the month less all expenses for the month. A budgeted income statement compares actual income and expenses to budgeted income and expenses. Perform a thorough review of the income statement, making note of large budget variances and items that appear outside the operating norm. Research any unusual items to determine if expenses have been recorded to the wrong account. If an expense is recorded to the wrong account, post a journal entry to reclassify the expense to the correct account.
Reconcile Accounts
When all accounts payable, accounts receivable and journal entries are posted, reconcile the balance sheet accounts. The balance sheet lists all assets and liabilities of a business. Assets include items such as checking accounts, accounts receivable, inventory and fixed assets. Liabilities include items such as accounts payable and mortgages payable. Reconciling balance sheet accounts helps ensure that all transactions have been accounted for within a specified accounting period. Whenever possible, compare balance sheet accounts to outside sources such as bank statements, an accounts receivable list and depreciation schedules. Designate a different employee to review and approve the reconciliations.
When the reconciliations are approved and all income statement budget variances are explained, you are ready to close the books for the month. Closing the books prevents the posting of any new transactions to the reconciled period.
