Closing the Books: Learn the Basics and How to Close the Books

General JournalsThe General Journal is a book of entry that holds the initial record of every transaction before being posted to the concerned accounts like Sales Journal, Purchase Journal, & Cash Journal etc. The two main types of the books of accounts are journal and ledger. The cash account will always be affected by adjusting journal entries. The statement of cash flows is not one of the basic financial statements. The statement of cash flows is the financial statement that is typically prepared last. The format of sales return is similar to that of sales journal excepting challan/invoice column where credit note is written.

Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand. A closing entry is a journal entry made at the end of the accounting period. But with the help of computer software, you may be able to prepare your own financial statements. After you finish entering the day-to-day transactions in your journals, you are ready to “close the books” for the period.

Cash Receipts Journal

One of the major purposes for closing your books at the end of each accounting period is to allow you to prepare financial statements that give you a picture of your business’s financial status. The financial statements prepared for most small businesses are a balance sheet and an books of final entry income statement. Post the account totals from your cash payments and your sales and cash receipts journal to the appropriate general ledger account to close the books. Cash payments (“cash disbursements”) include any payments made by cash, check, or electronic fund transfer.

• We now return to our company example of Printing Plus, Lynn Sanders’ printing service company.
• Notice that for this entry, the rules for recording journal entries have been followed.
• What a business transaction entails and the nature of the transaction are ascertained through narration.
• It’s easier to make adjustments to journal entries when you use accounting software with connections to expert bookkeepers and tax prep services.

Under the double-entry system, there are mainly 7 different types of journal in accounting. Transactions are primarily recorded in the journal and thereafter posted to the ledger. To keep on top of your monthly accounting responsibilities and cut down on time spent closing your books, create a monthly financial calendar. Your calendar can help you prepare for closing your books for the next month.

Recording Transactions in the Ledger Account

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. Bad debt expense is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting.

A purchase order also serves as a contractual agreement. The buyer is agreeing to make the purchase, and the seller, upon accepting the purchase order, is agreeing to provide the goods or services according to the specifics in the purchase order. Folio – this is a reference code showing the ledger page to which the entry will be posted. Closing the Dividends account—transferring the debit balance of the Dividends account to the Retained Earnings account. The following video summarizes how to prepare closing entries.