Definition: The accounting closing process, also called closing the books, is the steps required to prepare accounts for financial statement preparation and the start of the next accounting period. The closing process consists of steps to transfer temporary account balances to permanent accountsand make the general ledger ready for the next accounting period.
What Does Accounting Closing Process Mean?
The closing process consists of three main steps:
- Identify temporary accounts that need to be closed.
- Record closing entries.
- Prepare the post closing trial balance.
Since income statement accounts record current year activity, they must be zeroed out or closed at the end of each accounting period. This way they will have a zero balance for the start of the next accounting period and only current balances will exist in these accounts. In order to achieve this, closing entries must be made to transfer the ending income statement balances to balance sheet accounts.
At the end of each year, the revenue and expense account balances are transferred to the income summary account. This way all of the revenue and expense accounts will have a zero balance at the end of the year and will start the next year fresh with no prior activity.
The income summary account balance is then transferred to the retained earnings or capital accounts depending on what type of entity the business is.
After the closing entries have been made and all of the temporary accounts have been closed, a post closing trial balance is prepared. This is a listing of all the accounts with balances that will carry forward to the next accounting period. Since the income statement accounts don’t have balances anymore, you can think of this as the opening balance sheet for the next accounting period.