"Closing the books" is another 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 short, the main purpose of closing your books is to ensure that your accounting and financial reports are accurate and complete for a given period (typically last month, last quarter, or last year). It’s a multi-step process that generally involves reviewing your accounting from top to bottom, fixing any problems you find (usually by correcting transactions and/or making journal entries), preparing a Balance Sheet and P&L, and then locking down your numbers for the prior period.
We’ve worked with many small businesses that rarely — if ever — closed their books, and the results can be pretty horrifying. Therefore, we’d recommend that you close your books at the end of every year at least, to wrap up the prior year properly and file an accurate tax return. We’d also recommend hiring a professional accountant to handle the journal entries and closing process (not a rookie bookkeeper), because some experience and technical skill are required.
And for gosh sakes, don’t forget to set a closing date (or lock date) in your accounting system. If you overlook this last step, then all that hard work you just did to close the period can get messed up if somebody deletes transactions or makes a few unwise mouse clicks (we’ve seen it happen a million times).