CHAPTER V

CLOSING THE BOOKS

When I tell the truth, it is not for the sake of convincing those who do not know it, but for the sake of defending those that do.  William Blake

The closing of the books is more complicated than what we present here.  This explanation is to familiarize those individuals who may have a limited understanding of accounting.  This overview approach follows the same pattern as previous articles.

To explain the closing of the books, it is essential to review some concepts previously presented.  So therefore, we will review transactions, journals, ledgers, debits/credits, trial balance, and the adjusted trial balance.

• Transactions

For simplicity, we are defining a transaction as the movement of money.

These transactions can be identified by reviewing sales receipts and paid invoices.

For purposes of clarifying the definition of a transaction, keep in mind that money coming into the parish/school and money going out are considered transactions for the purpose of this explanation.

• Journal Entries

When a transaction occurs, an entry is made in the Journal.

1. The Journal is a chronological, day-to-day record of all transactions.
2. All transactions are entered into the Journal with at least one debit and one credit.
3. Recall that the debit increases cash and other assets and decreases liabilities.

• Ledger Entries

1. The journal entries are then posted to the ledger.  This is called posting.
2. The ledger is a grouping of accounts, based on the entities’ chart of accounts.
3. The chart of accounts is simply a listing of account titles where individual transactions can be grouped which aids in keeping track of the accounting activities.

We have recently reviewed the treatment of the temporary accounts of revenue and expense.  This understanding will help to present the final accounting activities to close the books.

Trial Balance – Beginning the closing of the books

1. The first step in the closing process is to prepare a trial balance.  This is simply a listing of all accounts that are grouped together from the ledger, with the total dollar amounts for each group separated by debits and credits.  One of the purposes of this trial balance is to ensure that all debits equal all credits. All that that will indicate is that the accounts are in balance.  It does not indicate that all entries of the accounts are correct.
2. Two columns are added to the trial balance worksheet so that the revenue and expense accounts can be identified and closed.  Normally, “closing the books” refers to closing the revenue and expense accounts, which are temporary accounts, while the other accounts are permanent accounts.
3. These accounts must be closed out and set to zero by posting them to an income summary account.
4. The total net amount of the two accounts is added to the net asset account.  In other words the difference between the temporary accounts --revenue minus expenses.
5. As an aside, the net asset account is a plugged amount since it is the difference between assets and liabilities.

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