"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 time period (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 is typically done by setting a closing date password in your accounting software, which prevents users from going back and changing prior period transactions.
We’ve worked with many small businesses that rarely — if ever — closed their books, and the results can be pretty scary. Why? Because the numbers keep changing and shifting around like quicksand. And when you’re an accountant who’s trying to review the books and prepare an accurate set of monthly financials for a busy business owner, that’s a really bad thing.
Therefore, we recommend that all small businesses close their books at the end of every year (at least), to wrap up the prior year properly and file an accurate 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 accidentally alters or deletes a few transactions (we’ve seen it happen a million times).