At the end of a financial year, the income and expense accounts (nominal or temporary accounts) are set to zero and their balances are transferred to the Retained Earnings account (permanent equity account) in the Balance Sheet. This process of closing the income and expense accounts and recording the net profit or loss is known as 'closing the books'. After closing the books for the year, the only accounts that have a balance are the Balance Sheet accounts. Closing your company’s nominal accounts at year-end is an important step in the accounting process and can be done by your accountant.
BQE CORE supports the automatic closing of accounts at year-end and rolls up your net profit or loss into the default Retained Earnings account, reflecting that on the financial reports. The reports automatically reflect the income and expense accounts into retained earnings. However, you can choose to manually close the accounts to control the transactions and journal ledger using the below accounting rules and steps. But note that the general ledger does not show those accounts prior to the current fiscal year.
Debit and Credit Rules
| Account Type | Balance | Increase Account Balance | Decrease Account Balance | Example |
| Real Accounts | ||||
| Asset | Debit | Debit (left column of account) | Credit (right column of account) | Cash, Accounts Receivable |
| Nominal Accounts | ||||
| Liability | Credit | Credit (right column) | Debit (left column) | Accounts Payable |
| Owner's Equity | Credit | Credit (right column) | Debit (left column) | Owner's Capital, Retained Earnings |
| Income | Credit | Credit (right column) | Debit (left column) | Sales, Profit |
| Expenses | Debit | Debit (left column) | Credit (right column) | Rent, Utilities, Advertising, Costs, Loss |
| Owner Draws | Debit | Debit (left column) | Credit (right column) | Withdrawals, Dividends |
Before you close your accounts, ensure the following has been done:
- Reconciliation: Make sure you have reconciled the CORE accounts with your actual bank statements. You must also reconcile all other accounts on your Balance Sheet.
- Adjustments: Make General Journal entries, if any adjustments are required.
- Payments: Make sure you have recorded and deposited all the payments, especially in case of cash-based accounting.
- Transactions: Finalize any pending transactions affecting your year-end closing.
- Accounts: Make sure your Chart of Accounts has an expense account called 'Income Summary' and an owner's equity account called 'Retained Earnings'.
To close your accounts at year-end:
Step 1:
Run a Trial Balance report in CORE. You can see the debit and credit balances on it for all your accounts. Alternatively, run a Profit & Loss report for the financial year you are closing out. Note all the income and expense accounts, Net Income amount and Opening Balance Equity accounts, if any.
Step 2:
Next close all the income and expense accounts in the General Journal by making new journal entries for the last day of the closing period, say December 31.
- Select all the income accounts and debit the amounts.
- In the last line, select the intermediate Income Summary account and credit the total of all the income accounts. This journal entry closes out the balances (zero) in all the income accounts.
- Now create a new journal entry for the last day of the closing period, say December 31.
- Select all the expense accounts and credit the amounts.
- In the last line, select the Income Summary account and debit the total of all the expense accounts. This journal entry closes out the balances (zero) in all the expense accounts.
Step 3:
Next, close all the Opening Balance Equity accounts in the General Journal by making new journal entries for the last day of the closing period, say December 31. This is required only if the opening balances were entered in CORE first time on migration.
- Select all the Opening Balance Equity accounts and debit the amounts.
- In the last line, select the intermediate Income Summary account and credit the total of all the Opening Balance Equity accounts. This journal entry closes out the balances (zero) in all the Opening Balance Equity accounts.
Step 4:
Next, close the intermediate Income Summary account and transfer the amount to Retained Earnings in the General Journal by making new journal entries for the last day of the closing period, say December 31.
- Select the Income Summary account and debit or credit it by the Net Income amount. If you have more income than expenses (profit), then debit this account. If you have more expenses than income (loss), then credit this account.
- Select the Retained Earnings account and debit or credit the same amount as the Income Summary. If you debited the Income Summary account (profit), then credit the Retained Earnings account. If you credited the Income Summary account (loss), then debit the Retained Earnings account.
Finally, the balance has to be zero for all the accounts in the Trial Balance and the Retained Earnings account has to reflect the new balance.
Note: You can pay dividends to the shareholders or withdraw profit from the Retained Earnings account by making the relevant General Journal entry and then writing a check for the same.
Step 5:
- Run your financial reports, such as Balance Sheet and Profit & Loss, as of your closing date, say December 31 of the closing year. The retained earnings show up under the Equity section of your balance sheet.
- Finally, close the accounting period so that no one changes the financial data of the company. This can be done by entering the Closing Date in the Settings > Company > Information screen, say December 31 of the closing year.