Closing accounts

What it means

Closing accounts are the accounts of account class 7 through which the books are opened and closed. They comprise the opening balance account 701, the closing balance account 702 and the profit and loss account 710. They ensure that every accounting period has a precise beginning and end.

The opening balance account is used when opening the books to bring forward the opening balances of balance sheet accounts from the previous year. The closing balance account captures the final balances at closing, and the balance sheet is drawn up from its figures.

The profit and loss account is used to close the income statement accounts for costs and revenues. The difference between the cost and revenue sides is the profit or loss, which is transferred to the closing balance account, linking the profit and loss statement with the balance sheet.

How it works in practice

When closing the books, income statement accounts are first closed to the profit and loss account, the result is determined, and then balance sheet balances are transferred to the closing balance account. Debit and credit totals must agree.

When the books are opened in the new year, balances from the closing balance account are carried through the opening balance account to the individual balance sheet accounts. The balances must match, which is called balance sheet continuity, and any mismatch signals an error.

In practice, accounting software performs these operations automatically at year-end. The accountant should nonetheless check that all accounts are closed correctly, that no unexpected balances remain and that the result matches the figures in the financial statements.

What to watch out for

An error when closing or opening the books carries over into the whole following year. If opening balances do not match the previous year's closing balances, the correctness of the entire accounts may be called into question, so this check is an important part of the year-end close.

When changing accounting software or accounting firm, transferring the opening balances correctly is particularly important. It is wise to compare the last year's balance sheet in the old system with the opening balances in the new one and explain any differences.