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الأحد، 18 يناير 2015
Closing the Books at the End of an Accounting Period
Closing the Books at the End of an Accounting Period
When you reach the end of an accounting period, hold off a second before pouring the bubbly: you still need to "close the books."
At a minimum, you will close your books annually because you have to file an income tax return every year. If you are having financial statements prepared, you will want them done at least annually. However, annual financial statements may not be enough to help you keep tabs on your business. You may want financial statements monthly, bi-monthly or quarterly.
Even if you are not having financial statements prepared, you may want to close your books monthly. Sending out customer statements, paying your suppliers, reconciling your bank statement, and submitting sales tax reports to the state are probably some of the tasks you need to do every month. You may find it easier to do these if you close your books.
How to Close Your Books
After you finish entering the day-to-day transactions in your journals, you are ready to close the books for the period. A step-by-step description of how to close the books follows. How many of the steps you do yourself depends on how much of the accounting you want to do, and how much you want to pay your accountant to do.
Of course, using the proper accounting software will consolidate many of these steps.
Total the general ledger accounts. By footing the general ledger accounts, you will arrive at a preliminary ending balance for each account.
Prepare a preliminary trial balance. Add all of the general ledger account ending balances together. Total debits should equal total credits. This will help assure you that your accounts balance prior to making adjusting entries.
Prepare adjusting journal entries. Certain end-of-period adjustments must be made before you can close your books. Adjusting entries are required to account for items that don't get recorded in your daily transactions. In a traditional accounting system, adjusting entries are made in a general journal.
Foot the general ledger accounts again. This will give you the adjusted balance of each general ledger account.
Prepare an adjusted trial balance. Prepare another trial balance, using the adjusted balances of each general ledger account. Again, total debits must equal total credits.
Prepare financial statements. After tracking down and correcting any trial balance errors, you (or your accountant) are ready to prepare a balance sheet and an income statement.
Prepare closing entries. Get your general ledger ready for the next accounting period by clearing out the revenue and expense accounts and transferring the net income or loss to owner's equity. This is done by preparing journal entries that are called closing entries in a general journal.
Prepare a post-closing trial balance. After you make closing entries, all revenue and expense accounts will have a zero balance. Prepare one more trial balance. Since all revenue and expense accounts have been closed out to zero, this trial balance will only contain balance sheet accounts. Remember that the total debit balance must equal the total credit balance. This will help ensure that all general ledger account balances are correct as of the beginning of the new accounting period.
Preparing Trial Balance Sheets
The trial balance is a worksheet on which you list all your general ledger accounts and their debit or credit balance. The total debits must equal the total credits. If they don't equal, you know you have an error that must be tracked down.
When closing out your books at the end of an accounting period, you will prepare three trial balances:
A preliminary trial balance is prepared using your general ledger account balances before you make adjusting entries.
An adjusted trial balance is done after preparing adjusting entries and posting them to your general ledger. This will help ensure that the books used to prepare your financial statements are in balance.
A post-closing trial balance is done after preparing and posting your closing entries. This trial balance, which should contain only balance sheet accounts, will help guarantee that your books are in balance for the beginning of the new accounting period.
Finding Trial Balance Errors and Keeping a General Journal
When preparing a trial balance, the total debits must equal the total credits. Don't be discouraged if they don't. Bookkeeping errors happen. Just think of the trial balance as a tool to find the errors. Use the following steps as a guide to track down the error or errors.
Be sure the numbers on your trial balance are the same numbers shown in your general ledger. Check to see if you properly classified amounts as debits or credits on your trial balance.
Go back to your journals (sales and cash receipts journal, cash disbursements journal and general journal). Check that the journal totals were properly posted to the general ledger. Were the correct amounts posted? Were they properly classified as debits or credits?
Go back to each journal again. Look at the totals that were posted to the general ledger. Do total debits equal total credits in each journal?
Go back to each journal again. Did you foot each column on each page of the journal? Did you carry forward all column totals to the next page? Did all the items entered in the "miscellaneous" column get posted to the general ledger?
Is the difference divisible by nine? If so, it could be a simple transposition error. For example, writing down 540 instead of 450 results in a difference of 90. Writing down 26 instead of 62 results in a difference of 36. Notice that both of these differences are divisible by nine. If the difference between debits and credits is divisible by nine, go back to the journals, looking for the error. Knowing that it may be the result of transposed numbers should help you find it.
Is the difference between debits and credits 1, 100, 1,000, 10,000, etc.? If so, it is probably an addition or subtraction error.
Divide the difference by two. Is the resulting number shown on your trial balance? If so, check to see if you have incorrectly classified the amount as a debit or credit.
Updating the General Journal
The general journal is usually a two-column journal used for unusual and annual accounting entries that aren't recorded in the sales and cash receipts and cash disbursements journals. Adjusting entries and closing entries, made at the end of an accounting period, are the most common entries made in the general journal. The general journal is also used to record special transactions that don't get recorded in one of the regular journals.
As an example of a "special transaction," on April 12, $7,500 was spent on new production equipment in your machine shop. At that time, the amount was incorrectly expensed to repairs and maintenance in the cash disbursements journal. It should have been recorded as a purchase of fixed assets. Upon discovery of the error, you make the following correcting entry in your general journal.
Repairs and maintenance
To correct 4/12/2011 purchases journal entry
General journal entries are posted to the respective general ledger accounts.