Accounting periods are a contrived method that makes financial management simpler and allows comparison between various accounting periods. Companies usually deal with them by recording transactions regularly, but compiling them at the end of the accounting period is mandatory. This completion process requires carrying out an administrative task that efficiently resets the recording of transactions before adding new ones.
At the end of an accounting period, various measures must be taken, including adjusting income statements and balance sheet accounts. Although there’s an availability of automated accounting systems to handle these processes, companies should acknowledge the complexity of the end of an accounting period. While technology might automate a majority of tasks, the rest undoubtedly require manual attention.
Anyhow, the closing procedure must be well-organized; it doesn’t have to be overwhelmed. Let’s break down the main tasks into two steps.
Temporary accounts (Income Statement):
Firstly, record the income and expenditures from the current period within the same period; otherwise, your closing income statement will show inconsistency. Ask your vendors to provide the ongoing work figures so you’ll include them in the income statement as well. All of these closed accounts are considered temporary accounts at the end of each accounting period.
Acknowledging your expenses and your revenue will lead you to better strategic decisions in the future; you’ll instantly know if you have to cut the costs or vice versa. However, closing temporary accounts is of pivotal importance for healthy business operations.
Permanent accounts (Balance sheets):
Throughout the accounting process, manage permanent accounts actively. This act is essential for determining the current business capacity accurately. Fortunately, no balance in the reports will vanish on its own, and every cash transaction adjusts accordingly. While some of these operations happen automatically, depreciation needs to be applied manually. It would help to revalue all the business assets at the end of the accounting period and make any necessary modifications.
Besides this, another vital task that requires equal discipline is the reconciliation of bank statements. Settling the prepaid assets to anticipate the value of payable amounts must be completed for a particular accounting cycle. A well-kept balance sheet calculates a business’s current status, which is ultimately crucial for its success.
Trial Balances:
Before the end of an accounting period, the remaining trial balance in every account must be accurately determined. It helps to ensure that all the debit entries are comparable to credit entries and any deviation updates through the adjusted trial balance. These reports will dictate several accounts’ opening and closing balances, which regulate your accounting system’s abnormalities and identify what you need to address.
Closing Entries:
Generally, automated accounting software will carry out the closing entries. However, it is crucial to comprehend the process. An income summary account came into being by closing off the income and expense accounts. It indicates that your income statement is ready for the next accounting period.
This account will be linked to the retained earnings account and represented as equity on your balance sheet. After the tax deductions and other expenditures, the retained earnings are converted into a net income account and distributed among the shareholders as equity.
Usage of an accounting period:
The use of an accounting period means that a business manages financial operations in a consistent and righteous pattern. Remember that many companies use a double-entry system by which they record each cash transaction in two ways—recording sales once as cash received and as the loss of an item from the stock a second time.
Closing an accounting period is a requirement, and you can never understand where your business financially stands without these closing adjustments. Having the necessary information will be useless if it’s scattered and all closing entries are performed accurately for the accounting period. If a business owner can’t make these adjustments on their own, there’s no shame in hiring a professional accountant for their assistance.
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