The accounting closing allows us to know the economic result of a period.
Accounting closing is the process that consists of canceling the income statements (made up of income, expense, sales costs and production costs accounts) and transferring these figures to the respective balance sheet accounts (assets, liabilities and equity). This closing allows us to know the economic result of the period and quantify the gains or losses .
The result of closing the income statements must be included in the equity account. This means that, if the results are positive (profits), the equity account increases, while if the results are negative (losses), the account decreases.
How to carry out an accounting closing
To cancel or close the income statements, it is necessary to make adjustments (depreciation of fixed assets, amortization of intangible assets, etc.) and reconciliations (of bank accounts).
In summary, the accounting closing involves, as a first step, the regularization of the expense and income accounts to obtain the result for the year . This allows you to know how much has been gained or lost in the period. Then the net worth accounts must be regularized (if it increased or decreased according to profits or losses) and, finally, all accounts with a balance must be closed so that it is equal to zero.
Various problems with accounting closing may arise from errors in the movement records. Among the most common are entries with wrong values, entries in erroneous accounts (writing expenses as income or vice versa) and undocumented operations (such as a purchase without an invoice).
Carrying out the accounting closing requires a series of steps.
The step by step
1) Make a balance sheet to check the sums and balances at the end of the accounting year, which is usually December 31, which shows whether the accounting is square or not . After this first step, if any error is found, it must be resolved before continuing. When using computer programs, it is advisable to check that the imbalances are real and not the product of technical problems;
2) Review all the ledger cards one by one to make sure there are no errors in the accounting, such as having forgotten to open a depreciation account, having entered some value incorrectly or that the balances do not match;
3) The adjustment of accounts that may modify the result of the accounting profit must be carried out. The accounts that must be analyzed are: inventories, fixed assets, provisions for expenses and risks, impairment of the value of assets, adjustments due to accruals, operations that have been charged to Net Equity, amortization;
4) Having completed step 3, it is now possible to know the result before taxes , that is, the subtraction of accounting expenses from accounting income. But to find the tax result, it is necessary to make certain adjustments established by the Corporate Tax Law (said tax is calculated by multiplying the tax rate by the profit for the year).
We are now in a position to close the year; In other words, the four steps described above allow you to regularize and close the current year, and open a new accounting year. It is very important to have a backup copy of all information, whether it is used on computer media or on paper.
Computer help in accounting closing
Although there are a large number of computer tools specially designed to assist accountants in carrying out the year-end closing, just as in the past there were no alternatives to paper, good use of spreadsheet applications allows the activity to be automated without the need. to purchase a specific program.
However, one of the risks of making our own tables is that we can overlook some fundamental element for accounting, and generate errors that come to light in the long term.