"Closing the books" is one of those phrases that accountants tend to throw around a lot, but never really explain.
That's unfortunate because it's an important concept that all business owners should understand and be aware of.
In a nutshell, the main purpose of closing your books is to ensure that your accounting and financial reports are accurate and complete for a given period of time (typically last month, last quarter, or last year). It’s a multi-step process that generally involves reviewing your account balances and general ledger from top to bottom, correcting any mistakes you find (usually by fixing transactions and/or making journal entries), preparing an accurate Balance Sheet and P&L, and then locking down your numbers for the prior period. This last step is typically done by setting a closing date password in your accounting software, which prevents users from going back and accidentally changing prior period transactions.
We’ve worked with many small businesses that rarely — if ever — close their books, and the results can be pretty horrifying. Why? Because the numbers keep changing and shifting around like quicksand. And when you’re trying to prepare an accurate set of financials or a clean tax return, that’s a really bad thing.
Therefore, we recommend that all businesses close their books at the end of every year (at least), to wrap up the prior year properly and file a solid tax return. We also recommend hiring a professional accountant to handle the closing process and journal entries (not a bookkeeper), because some experience and technical skill are required.
And for gosh sakes, don’t forget to set a closing date/lock date in your accounting software. If you overlook this step, then all the hard work you just did to close the prior period can get messed up if somebody unknowingly changes or deletes a few transactions. We’ve seen it happen a million times, and it’s not a fun problem to deal with.