The primary reasons why an accountant needs to close the book are the end of the reporting period and the necessity to prepare the financial statement and results of the company’s activities. Before preparing the annual financial reports, the accountant is required to form the final transactions for the reporting period (Bragg, 2011). In a computerized accounting system, closing a period means performing a set of routine operations. Such activities include charging the depreciation and closing cost accounts, sales accounts, other income and expenses, and sub-accounts for accounting for the financial result.
Among other reasons to close the book is the requirement to restrict access rights to operations in the computer databases in the completed months to give only the view mode for responsible people. This is necessary to not mistakenly reflect the transactions of the reporting period in previous months and not to change the recorded financial information of the past periods. It is also helpful to close the accounting period properly to avoid any manipulations with data and figures, which those who have access to the accounting books can conduct.
Several accounts must be closed by the end of the books’ period, including revenue, expense, and dividend accounts. Assets, liabilities, Common Stock, and Retained Earnings accounts should not be closed. For instance, we have the following information in the table:
Several activities should be done, first is closing the revenue accounts, namely transferring the credit balances in the revenue accounts to a closing account called income summary. The second is closing the expense accounts by allocating the debit balances in the expense accounts to an income summary account. The third step is to complete the income summary account and pass this account’s balance to the retained earnings account. Finally, it is required to close the dividends account and transfer the dividends account’s debit balance to the retained earnings account so that both debit and credit will account for zero.
Reference
Bragg, S. (2011). Bookkeeping Essentials: How to succeed as a bookkeeper. New York, NY: Wiley & Sons.