Like everything else, an accounting cycle also has a specific time when a business owner must close it down. It is a necessary step in keeping the accounting system of a company free from any complexities. But this is not something that all business owners understand.
Closing an accounting cycle helps you smooth out any wrinkles and define the balances left at the end of the process. It enables you to stay coordinated with all the stakeholders.
You must follow specific steps when you begin closing an accounting cycle. It would help if you went about it systematically to avoid any inconveniences later. But before jumping into that topic, we must first understand an accounting cycle.
What is an Accounting Cycle?
An accounting cycle records all the company’s financial data saved, analyzed, and recorded over time. In an accounting cycle, all the data, including payrolls, investments, payments, profits, and any losses the business may have sustained in a specified period.
It assists a business owner in identifying all transactions revolving around the business and helps them analyze them, sort them out, and highlight the trial balance. Keeping the company’s finances clean and clear through an accounting cycle would allow the business owner far more than they can imagine.
Closing an Accounting Cycle and Why It Is Important
The process of closing all accounting entries begins once an accounting cycle ends. Each accounting cycle stays in use for a specific amount of time before it is time to bring it to a conclusion. The job of closing entries is to clear out any dues and balances before a new cycle begins.
Closing an accounting cycle is one of the essential parts of having a successful accounts system for your business. Clearing any due payments means that the balances are all presented clearly, so no doubts are in the equation. Although sorting and keeping the finances organized is what accounting is based on, clearing due and balances is an equally crucial step that would keep the business in excellent financial health.
Closing entries also highlight the progress of the company. Once the cycle is closed, all remittances are calculated and compared to the past year’s. It would be vital for the business owner to conduct their expenses if they know their company’s performance.
Steps to Close an Account Manually
- The first step in closing entries for an accounting cycle is that the accountant/business owner must identify and locate all the revenue accounts under the company’s name.
- Once located and identified, the accountant must calculate each entry made in the accounting journals for each account to calculate the credit and trial balance.
- The accountant should return the accounts to zero credit so that it can clear the report.
- The next step would be to locate all accounts that deal with expenses. Once these accounts have been found, as with the revenue accounts, the accountant must calculate each entry for all the expense accounts to bring the credit down to zero.
- The calculations then move towards the income summary accounts. If there is a credit balance by the time the funds are cleared, that would mean that the company has profited. But if the balance is in deficit, the company has suffered a loss during that cycle.
- Finally, the accountant must turn their attention towards the dividend as well as the savings accounts. Once these have been cleared, it can calculate the company’s net income.
Let the Software do the Job
With the world undergoing a technological revolution, life has never been easier. Companies now invest in accounting and financial software to cater to their needs. The software does the job without making you go through the hassle of all the calculations, making the situation complex. Now is the time to invest in accounting software to complete the job easier and save the cost of employing an accountant.
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