As you get ready to close your books at the end of the year, it’s time to get organized and learn everything you need to know to make the process stress-free! Closing your books is a key part of your bookkeeping…but if it’s new to you, it’s totally okay to be nervous.
Don’t worry—I’m here to support you along the way. As a new business owner who has to close your books, you’re likely wondering exactly what it entails and how to do it easily.
When you close your books, you’re setting yourself up for success in the following year by gaining a clear picture of your finances! You’ll be able to plan ahead and know exactly where you can improve…which is incredibly important, especially if you’re a newer business owner!
Why Is Closing Your Books So Important?
Before we explore why it’s important to properly close your books (and how to do it), let’s back up. Your “books” are reports including your revenue, income, and expenses. To close your books, you’ll need to “zero” your income and expense accounts and add your net profit (or loss) to your business’s balance sheet.
Many types of accounting software programs will help you close out your income and expense reports automatically at the end of the year. With some software programs, you can set up a specific automatic closing date and password.
The main goal of closing your books is to ensure that your income and expenses from one year don’t roll over into the next year. That would mess with the accuracy of your accounting, which is a tricky issue to handle in your business.
For most business owners, you’ll need to close your books each year. This lets you create helpful, insightful financial statements. If you want to understand your business’s financial wellness, this is essential!
And in order to accurately file your income tax returns at the end of the year, you have to close your books. But you’ll also get to keep all of your accounting and bookkeeping organized and on track for the following year.
Let’s look at some of the most important reasons to close your books.
You Can Prepare Financial Statements
Preparing financial statements is one of the most important outcomes when you close your books. Having accurate balance sheets and income statements allows business owners to get a clear picture of their financial well-being.
Often, business owners outsource the preparation of these financial statements to an accountant. But you can definitely handle it yourself, especially if you take advantage of software programs like Quickbooks Online!
Related: How To Handle Basic Bookkeeping For Your Business On Your Own Like A Pro
You’ve likely heard of an income statement referred to as a “profit and loss statement.”
No matter what you call it, this document will detail your income, expenses, and net income or loss. This is also what a tax return utilizes to determine your total taxable income!
Sometimes, we refer to a balance sheet as a “statement of financial position.” You can think of a balance sheet as a photograph of your business’s financial position at one particular point in time.
Your balance sheet will include your liabilities, assets, and net worth (the difference between the two).
When You Close Your Books, You Can Take Care Of Your Taxes Efficiently
Another important reason to properly close your books is to make sure all of your taxes are fully compliant and ready to go. You’ll also be able to accurately prepare your tax returns.
With the right accounting tools and bookkeeping system, the idea of preparing your taxes won’t be so overwhelming!
Why You Should Use Software Like Quickbooks Online To Close Your Books
Accounting software like Quickbooks Online is always incredibly helpful. But particularly, when it’s time to close your books, having a tool like this will save you TONS of time, effort, and stress.
With Quickbooks Online, the process of closing your books is pretty automatic. It takes a lot less effort on your part, and you don’t have to worry about doing any math manually. That’s awesome because it saves you time and eliminates human error from the equation.
Honestly? All of the technical steps to closing your books are what can make accounting seem stressful, especially when you’re handling everything yourself. But with Quickbooks Online, it happens neatly behind the scenes…so that YOU don’t have to worry about a thing!
Don’t Forget These 5 Steps As You Close Your Books
Although accountants often handle bookkeeping, as a small business owner, it’s super helpful to know the ins and outs of what it means to close your books at the end of the year.
No matter if you’re DIYing your bookkeeping or outsourcing to an accountant, you should understand the basics of how the process works!
Here’s how to close your books in a few key steps.
Reconcile Your Bank Accounts
Your year-end bank account statements should match the balance on each of your books. It’s important to reconcile your accounts (aka make sure they match!), especially if you’ve been entering numbers by hand.
But even for those of us who use software, it’s important to double-check all the numbers at the end of the year.
Make Sure Your Payroll and Income Accounts Are Good To Go
When you’re ready to close your books, you also need to reconcile your monthly (and year-end) payroll expenses and income statements.
The payroll expenses for each month and the total at the end of the year need to match. This is essential for taxes! For your income statements, the goal should be to make sure everything is categorized correctly.
Related: 7 Common Accounting Errors You Might Face As You DIY Your Bookkeeping
Make Sure All Invoices Are Taken Care Of
When you’re getting ready to close your books, make sure to account for all of your money. Make sure that any year-end invoices you’ve received are paid and cleared, and that any invoices you’ve sent have been paid.
There’s a LOT for you to handle in your business at the end of the year, so it’s easy for an invoice or two to slip through the cracks. But that can mess up your numbers and cause you to overstate or understate your accounts, so it’s best to double-check!
Put Together Your Financial Statements
Now, you’re ready to generate your financial statements—this is where you’ll create your balance sheet and income statement (Profit & Loss).
If you use accounting software like Quickbooks Online, you can create these reports automatically! Or, you’ll need to create them by hand, which can be tricky (and is easier to outsource).
But these reports are so important! They give you a clearer understanding of your business’s financial status.
Consider Fixed Asset and Depreciation Expenses
Once you’ve created your balance sheets, it’s important to make sure everything is accounted for. One area that we often miss is any sort of big fixed asset purchases! These types of things have to be accounted for, especially depreciation.
This includes large purchases of over $2,500, such as computers, office equipment, and furniture. These expenses should go in a Fixed Asset account and will show up on the Balance Sheet.
There you have it! Now, you know exactly what it means to close your books and the basics of what that process involves.
Of course, it can be made much simpler with accounting software (I recommend Quickbooks Online). But knowing the steps helps you understand what’s happening in your business, especially as you start to grow!