What you’ll learn to do: Prepare and post closing entries

Let’s review our accounting cycle again. We have completed the first 7 steps, and now we come to the final steps that are all part of the closing process.

At the end of the year in the old paper-based accounting system, the journal would be put in a safe and a new journal started (often businesses had so many transactions they had multiple huge journals). Obviously, with our computer data storage systems, we just keep adding journal entries to our digital files. By the same token, the ledgers by the end of the year were full of entries and cumbersome, to say the least, so we closed them, both literally and figuratively. We got a new ledger with all blank pages, and with some permanent accounts, such as our checking account, we brought the ending balance from the old book forward, and that balance became the beginning balance in our new book. But there are other accounts, like the revenue and expense accounts, that we want to track only for one year. We call those temporary accounts, and when we start our new book, we just start accumulating those amounts from zero.

Modern accounting information systems don’t post closing entries. However, there is still a closing process that prevents the accountants and bookkeepers from accidentally posting entries to the prior period. The closing process means any books and records that produced the official financial statements are “closed” to any further entries that would cause them to no longer match the published financials.