As many of us will be looking to close down the financial year 2019, in this blog post we will attempt to clarify what the closing entries for the year consist of, when making an the entries for the closure of the accounting year.
The closing entries
The closing entry/entries is one that consists of clearing off all income and expense accounts, this is commonly known as your Profit and Loss account which holds your current years trading activity. At the end of each trading year the balance on these accounts are transferred out to the balance sheet.
Basically we make an accounting entry taking the accumulated balance of each of the income and expense accounts, but in the opposite direction. So, for example the sales account which is a credit in your Profit and Loss account, to clear this down you would create a journal debiting the sales account and crediting the ‘Retained Earnings’ account within your balance sheet.
Likewise, for the accounts with a debit balance, for example salaries, vehicle expenses you would create a journal crediting these accounts and debiting the Retained Earnings account.
The end result would be that all Profit and Loss accounts would then be zeroed out and the entire totals of all of your Profit and Loss accounts would be transferred to the balance sheet. This would then become Profit/Loss brought forward from previous years when you begin your new financial year.
To enable you to complete this exercise you can run what is called a Trial Balance at your year end listing all of your accounts or you can run one just from your Profit and Loss accounts.
Below is a trial balance as at 31.12.19 listing all the accounts, both balance sheet and profit and loss…..
The next picture shows the highlighted accounts which will need to transferred so that when you start processing for your new financial year these accounts will only contain current financial year trading information.
The Profit and Loss account only reflects your current years trading so each year this exercise needs to be completed. Whereas the Balance Sheet shows all previous years activity.
With some online accounting systems you have the ability to create year end adjustments in draft and then run the report to include these. This is extremely helpful as even the best of us get entries round the wrong way so having the ability to preview entries prior to booking is a very useful tool and Reviso has this.
This is a fundamental process in accounting since it will, together with the opening entry of the following fiscal year become the link between the accounting of one fiscal year and another.
Fortunately, most accounting management programs automatically perform the process and closing with a single “click” , otherwise we would need to perform this process every year.
In particular, in the case of Reviso, it is a very simple operation that can be carried out as many times as you wish and automatically updates the balances of the affected accounts.