Closing the books

What it means

Closing the books means the year-end operations: posting accruals, depreciation, provisions and exchange differences, and closing the income and expense accounts.

Only then are the financial statements prepared. Closing and the statements are not the same: the first is work in the books, the second is the output that is filed and published.

Closing has two layers. Cost and revenue accounts are closed to the profit and loss account, which shows the result for the year, and balance sheet accounts to the closing balance account. The new year takes its opening balances from that account when the books are opened, so the end of one year is literally the start of the next.

How it works in practice

Before closing, balances are agreed: the bank to the statement, receivables and payables to the sub-ledger, stock and cash to the stocktake. A discrepancy must be found now, not a year later.

The trial balance after all closing entries is the control. It has to agree to the cent, otherwise there is nothing to prepare statements from.

We agree a closing timetable with the client in advance: when the December documents, the stocktake results and a list of uninvoiced deliveries will arrive. Invoices for the past year that come in after the deadline are captured as an estimated accrual, so the cost stays in the right period without waiting for the paper.

What to watch out for

Once closed and approved, the period is not touched with ordinary entries. An error found later is handled by a correction in the next period or an amended return, not by rewriting the past.

A period closed only on paper but still open in the software. Anyone can later post a document into it, the statements stop agreeing with the filed accounts and return, and the difference takes months to trace. After closing, the period must also be locked technically in the accounting software.