What Does it Mean to ‘Close the Books’? When Should You Close Them?

When to close the books.

Process for closing books.

How to close the books.

If you’ve kept up with your bookkeeping throughout the year, the process for closing your books is simple.

In this case, your bookkeeping software will already have generated preliminary account balances for you, and closing the books consists of verifying the accuracy of these preliminary balances, as well as checking and recording any transactions that don’t run through your external accounts.

Step 1: Reconcile to your bank statements

Start by reconciling your balance sheet accounts to any external statements such as bank statements or business credit card statements.

To do this, obtain your year-end statements and compare the year-end balance on your statements to the year-end balance for the corresponding accounts on your books.

If an account’s balance on your books matches the bank statement balance for that account, great!

If not, you’ll have to compare, line by line, the transactions in your books with the transactions on your statement, starting with the last date the account balance in your books matched the account balance in your statements. Common issues include:

• Posting date discrepancies between your statements and your software
• Missed or double-counted transactions in your software

Step 2: Check the accuracy of other accounts

Once you’ve gone through the process above for all accounts kept at a financial institution, the balances for these accounts in your bookkeeping software should match—or have explainable differences with—the balances on your statements.

Now, your focus turns to accounts whose transactions aren’t reflected on a bank or credit card statement. There are plenty of accounts that don’t run through a statement and your business likely has several. Accounts receivable is a common example.

The details of checking these kinds of accounts differ with the accounts themselves, but the concept is the same: Think of all the events that affect the account’s balance and ensure that all of these events have been captured in your software.

Step 3: Record necessary journal entries

Finally, you may need to record some journal entries to properly close your books. A common one is depreciation expense on fixed assets. 

To create this journal entry, first determine what your depreciation expense should be for the year. You can use a fixed asset software to calculate it for you. Then, record the transaction in your bookkeeping software by debiting and crediting the proper accounts—in this case, depreciation expense and accumulated depreciation, respectively.

If this sounds confusing, consider reaching out to a professional accountant or bookkeeper to help you close your books.

Advanced situations

When does closing the books become complicated?

While closing the books is often a straightforward process, there are times when it can become complicated to wrap up a financial period in a company’s history. A few examples of complications include:

• The person in charge of bookkeeping didn’t categorize expenses, leading to ambiguity about where the money went. 
• There’s a backlog of several months when various invoices and costs weren’t recorded, turning a simple process into a large project.
• Your business uses a complicated accounting process (like accrual-based accounting) that follows a strict set of rules and multi-entry documentation. 

Fortunately, many of these factors are in your control. You can set up clear categorization for better insight into your business and prevent a backlog of invoices from building up. Good organization and attention to detail are the antidotes to overwhelming bookkeeping projects.