Even though accounting has mostly gone digital, the term “closing the books” continues to stick around the accounting world. In the past, the “books” referred to the journals and ledgers that were used to keep track of transactions.
To close those books simply meant making sure that all the pieces of information within a certain period (usually a month) were accounted for so that the information provided in reports like the balance sheet and income statement would be accurate for that period. The way accountants went about closing the books was a much more manual process in days past, but the goal remains the same.
Closed books allow for accurate reports. Accurate reports, in turn, help you run your business.
Why Is It Difficult to Close the Books?
On the surface, closing the books sounds simple. However, it can be tedious work due to the processes surrounding accrual accounting. If you ran your business on cash accounting, you’d be mostly done after all your transactions were recorded.
However, accrual accounting recognizes income and expenses when they are incurred, not when money changes hands, adding a layer of complexity to the process.
The accountant closing the books also needs to take into account less tangible items like interest or depreciation. This means that after transactions are recorded, they need to adjust the books for these kinds of costs.
Then there are tests the accountant needs to perform to make sure there are no errors. Credits should equal debits, and the balance sheet should, well, balance. If these things do not happen, the accountant will need to do a little digging to see where things went wrong. Once everything has been proven accurate, closing entries are made to record income and retained earnings.
How Long Does It Take?
Because of the complexity involved in closing the books, it can often take the average accountant several weeks to close them. Software solutions can speed up the process, offering reports a few days after the period’s close.
The longer it takes, however, the more stale your financial reports become. Quick decisions require real-time data. Your balance sheet and income statement can teach you quite a bit about the health of your business. So if you don’t learn how to close the books yourself, learn how to read and analyze those reports.
Closing the books is a common accounting term. To brush up on your accounting vocabulary, check out our list of the terms and phrases you need to know.