End of Year Reporting Part 2: Closing Entries
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End of year reporting requires some planning to make sure that you have a complete and accurate picture of your finances. Small Business Management and Accounting Guru Kelli Wall has broken down all of the steps you need to set up for creating your end of year reports.
In Kelli’s last post, she covered adjusting entries and how you can use the Adjusting Entry form in WorkingPoint to account for depreciation and other end-of-reporting-period adjustments. In addition to adjusting entries, closing entries are made to “close-out” certain accounts balances at year-end and move them to Retained Earnings.
Before computerized accounting, accountants would manually record closing entries in temporary accounts (such as income, expense and dividend accounts), so the account balances would be reset to zero for the start of the next period. The entries would effectively zero out the individual account ledgers and increase a holding account called Income Summary.
The final step in completing the closing entries was zeroing out the Income Summary account and moving the balance to Retained Earnings. The Retained Earnings account value is, essentially, an accumulation of your profit that is retained by the business instead of being paid out to investors. Retained Earnings are viewable on the Balance Sheet report and reflect the amount retained by the business over the life of the business.
Today, in computerized accounting, much of this is done under the hood. No longer do you have to transfer balances from one account to a holding account and then move the holding account to Retained Earnings.
In WorkingPoint, we don’t consider income and expense accounts temporary. So unlike other popular systems, we don’t zero out the balance in the accounts. You can always see the amount you have earned or spent since you began using WorkingPoint to manage your business activity. You can always change the view of your activity lists so you can filter the activity for a specific date range but you’ll also always be able to see how much you have earned or spent to-date at a glance from the Accounts List. Reports also will show you the activity for these accounts for any date range you specify.
Even though we don’t zero out the account balances in your activity lists, we do zero-out your Net Income account and move the balance to Retained Earnings at the end of your fiscal year. By zeroing out your Net Income, you can start fresh for the new year and you can track the amount of profit retained by the business over the life of the business.
So, if you have a WorkingPoint account you can sit back and relax and know that WorkingPoint is handling your closing entries for you! And if not, maybe it’s time to set one up!