You'll close your books on a regular cycle, in sync with your fiscal year. At minimum, you'll close on an annual basis. Larger companies might close quarterly or monthly.

This is an advanced accounting concept. Tread with care.

Is closing the books necessary?ShowHide

This is a great question for your accountant; their answer may surprise you.

For many of our customers, closing out a period isn't necessary because they are more interested in the monthly cycle. Adding extra entries to clear out income and expense from prior years is viewed as extra work. For these folks, as long as the monthly statements look ok, the picture in other accounting reports, like a balance sheet and trial balance, don't really matter.

If you're not sure, consider the following:

  • Close the books if you've been asked by your accountant.
  • Close the books if you'd like to separate year-to-date income and expenses from prior year earnings.
  • Close the books if you'd like to separate year-to-date owner draws and contributions from prior year transactions.

If the items above don't resonate, then closing the books may be unnecessary.

Suggested steps to close the booksShowHide

You'll close your books on a regular cycle. At minimum, you'll close on an annual basis. Larger companies might close quarterly or monthly.

  1. Determine your goals. Which accounts need to be closed out? Write these goals down to remind yourself.

    When you close the books, you're making temporary accounts that change on a regular basis more permanent and zeroing out those same accounts for the next period. Depending on your reporting needs, you might only need to close out Retained Earnings. Or maybe you only need to close out Owner Draw and Owner Contribution.

  2. Reconcile your bank account(s) for the entire period. see "Bank reconciliation"

    A bank reconciliation is your first step in finding glitches in reports. They uncover typos, duplicates, and other problems. When you close the books, you're declaring that everything is perfect.

  3. Reconcile your property balances to your bank account balances.

    This step is usually only necessary if you use trust accounting. Follow the guidance provided by your real estate licensing board to complete this step.

  4. Create a prior year equity account. see "Chart of accounts"

    For example, if you're closing out 2011, you'll create an equity account called 2011 Retained Earnings or Prior Year Earnings. Ask your accountant for advice on how to name this account if you're not sure.

  5. Gather amounts that need to be close out. see "Trial balance report"

    The trial balance report should be run for your period. For example, if you're closing out 2011, your dates would be January 1 through December 31, 2011.

    Highlight the totals in any income accounts, expense accounts, and equity accounts that you'd like to shift over. For example, if your goal is to close out Retained earnings on your balance sheet, you'll want to highlight the component parts of that equity account: the income and expense accounts.

  6. Add an adjusting entry to close out equity, such as Retained Earnings, Owner Draw, and Owner Contribution. see "General journal entries"

    If you're not closing out individual equity accounts, skip this step.

    Add a general journal entry that debits your equity accounts and credits the prior year equity account. The date of this general journal entry is the last day of your period.

  7. Double check your work by running a trial balance for your original period.

    For example, if you were closing out 2011, run the report for 2011. The accounts that you closed out should now have a final balance of $0. Instead, the summary accounts that you created will reflect the balances.

Article #: 111122

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