What is the Purpose of the Closing Process in Accounting?

Accurate financial records are essential for companies to make informed decisions about their future. The closing process in accounting is the set of procedures used to finalize all accounts for the reporting period and prepare financial statements so that companies can obtain accurate records of their financial position. This blog will explore what the purpose of the closing process in accounting is, as well as how it helps companies maintain correct records and make informed decisions about the future. Read on to learn more about the closing process in accounting and why it is so important.

The closing process is broken down between monthly and year-end. Both closing processes should follow a checklist to ensure all the tasks to close the periods are completed. Monthly processes include reconciling cash and credit cards, recording monthly sales, posting accounts payable, and recording monthly payroll entries, just to name a few. Year-end closing processes will include ensuring all the 1099 vendor information is correct, all balance sheet accounts have been finalized, and all year-end accruals have been captured. Each company will need to document its own monthly and year-end closing process task checklist based on its specific industry and specific company’s operational and financial circumstances. Following the checklists ensures that all required postings and data entries are entered and valid before they are reported in the financial statements. The closing process’s goal is to ensure that a company’s books are accurate and up to date so it can adequately assess its current and potential project its future financial situation. 

In addition to the standard monthly and closing entries that are defined on the monthly closing checklist, you may need to do the following as well.

Adjusting Journal Entries

Both closing processes may include adjusting journal entries, which involves making corrections or adjustments to earlier transactions. These can be used to correct errors or misstatements identified in the books of accounts. These adjustments help companies to recognize revenue or expenses that have been recorded in the wrong period or wrong account. The adjusting entries also help bring accounts back into balance and to record any transactions that were not captured during the periodic accounting cycle.

Transferring Net Income or Losses to Retained Earnings

This process is only completed during the year-end process. This is the last year-end transaction to occur once the year-end financials are finalized. When the new fiscal or calendar year is started, the previous year’s net income or loss is added or subtracted from the retained earnings account balance. Net Income for the current year again starts back at zero until the end of the year when it happens again. Accounting systems automatically record this transaction when the new accounting year is started.  

Preparing Closing Trial Balances

Another critical element of the closing process is preparing a closing trial balance. This is mainly important at year-end when the auditors ask for a finalized Trial Balance report. The closing trial balance is a necessary step in the closing process, as it ensures that all accounts are up-to-date and accurately reflect the current state of the company’s finances. Additionally, this document helps business owners reconcile their performances at the end of each accounting period. The closing trial balance mainly serves as a basis for creating the company’s financial statements from which sound financial decisions can be derived.

Benefits of the Closing Process

The primary benefit of the closing process is that it ensures accurate and up-to-date accounts for companies, which allows for informed decisions about the future. The closing process also can help companies detect any potential discrepancies or errors that may have occurred during the reporting period. Closing out temporary accounts allows companies to carry forward only permanent accounts to subsequent periods, which helps streamline their bookkeeping processes. 

In conclusion, it’s essential for any business or organization to understand what the purpose of the closing process in accounting is. Create your company’s monthly and year-end closing process checklists, follow them, and update them as needed. This will assist your business in accurately reporting its monthly and yearly finances and enable more informed decisions through this process.

Get A FREE Consultation

Fill out the form below and someone will get back to you as soon as possible.

"*" indicates required fields

This field is for validation purposes and should be left unchanged.