Closing the Books – QuickBooks

Watch the Video “DID YOU OR DID YOU NOT CLOSE THE BOOKS?”

Its a simple process and yet the act of closing your books carries a great responsibility for an owner, an accountant and the bookkeeper. Why, when and how are all important. Most people who use a software to automate their accounting may know how to close, but may not be using the closing feature because they dont know the why and when. So, hopefully, this little blurb will help you understand its importance and the timeline so you can show the love to the accountant, the owner and even the government.

Let’s start with the WHY! You close your books by recognizing a period of time has just elapsed in the company’s business year and you want to safeguard the information’s integrity. It may be a month, a quarter or a year, but that time frame represents company transactions, such as sales, disbursements, depreciation (the loss of value of something you own). If a company is to maintain it’s integrity then your books should have a stopping point where you dont make any changes and that information stays the same forever and ever. This is especially important if, for example, you give the first quarter (January-March) reports of a company to a banker who is giving you a loan. At March 31, your financials said that you had X amount of Assets, Y amount of Liabilities and your company worth is Z. How freaked out would that bank be if they gave you the loan and then someone changed an inventory number or you wrote off some Account Receivables (Asset) and now your company was worth less? You now have lost trust with that bank as you provided a successful picture of your company’s health, but went back on your word.

WHEN should you close the books! Every company sets a different standard, but we encourage you to just SET a standard based on your company’s culture. If monthly is your choice, then you should make sure that all billing is performed, all vendor bills are entered, all journal entries are posted, all banks and other financial obligations are reconciled to a statement, including loans, lines of credit, inventory and even Accounts Receivable and Accounts Payable documents. Once that is all reviewed, close the period and NEVER GO BACK. Wait, you say, what if I missed something? Then, you enter that transaction into the current period (April) and make note of it’s original date. Closed means never having to say you’re sorry for changing it!

Other companies choose a quarterly or annual closing. If it is annual, it is even more important to segregate the periods as there is a tax return involved and a fiscal year ending. My suggestion is that all accounting activity is entered in a timely fashion (transactions, journal entries, reviews, reconciliations, etc). Call the accountant and ask for last year’s Trial Balance and make sure it matches your information for last year. When you are ready to hand off your information to your accountant, you close the books right then and there. Yes, there may be journal entries that need entering later, but if you change something in that closed period, those journal entries will be worthless as they were based on the financial statements that you provided in the first place. For some software, you cannot close the books and then go back and make entries, so you should print a copy of financials as they were sent to the accountant. Ask the accountant to send back their journal entries and their final Trial Balance. Once you put in those entries, run your own Trial Balance and compare it to the accountants. If all is well, then close the books.

So, why would we go through the trouble of explaining all of this to you? We want our clients to be of good integrity with their books. It saves time, money, and hair pulling. And it is simple: In QuickBooks, go to the Edit Menu, choose Preferences, choose the Accounting/Company Preferences and enter a closing date and a password. There, I gave you a present, free advice! Happy New Year and good luck in all of your ventures…..and dont forget….. CLOSE YOUR BOOKS!