5 Role Important Activity Close Books For Company

Companies routinely close their books in certain accounting periods. This applies to service companies, trading companies, and manufacturing companies.

Closing the book marks the end of a company’s financial reporting accounting period.

Several companies close their books at the end of every month. However, what is certain is that companies are required to close their books at the end of each year.

Do you know why companies must close their books?

This article will discuss further what is meant by closing a book, what is the purpose of closing a book and the function of closing a book.

Book Close Explanation

What is a Close Book?

Closing the books is the final process in accounting by closing all financial accounts in a certain accounting period to prepare the accounts for the next accounting period.

Closing the books is carried out after all financial reports have been prepared. To close the books, accountants must make closing journals so that the accounts can be closed.

Closing the books is the final process in accounting by closing all financial accounts in a certain accounting period to prepare the accounts for the next accounting period

Close the Books at the End of the Year and the End of the Month

In general, books are closed at the end of each year. However, some companies do this at the end of every month.

Closing the books at the end of the month means a process of closing transactions that have been carried out during that month and moving on to the next month (Himayati, 2008).

When closing the books at the end of the month, journals will be formed, such as the asset depreciation journal and revaluation journal (available if the company is in the export and import sector).

Meanwhile, the company closes the year-end books at the end of the year and generally in December.

Accounts in the Ledger

Before discussing book closing further, it is necessary to understand that at the end of the accounting period there are 6 accounts recorded in the company’s ledger, namely:

  • Asset accounts are goods or rights owned by the company and have value and benefits or are often called assets, for example inventory, securities, vehicles, trade receivables and company cash.
  • Liability Accounts, better known as debts or loans owned by the company, such as debts to banks and trade payables.
  • Capital Account, is the investment/wealth of the company owner which can consist of personal wealth, retained company profits, and company shares.
  • Private Account , is an account that records capital expenditures by the owner of the company which are used for personal purposes and is usually found in small companies.
  • Revenue Account , is an account that contains a company’s operational income, for example sales of services or goods, and sales returns.
  • Cost Account , namely expenses made by the company, such as employee salaries, insurance, necessities or company equipment.

Nominal Account and Permanent Account

In the book closing process, the company will move the nominal (temporary) account to a permanent account.

What is meant by a nominal (temporary) account is a company account that is temporary and will be closed at the end of the accounting period, namely when the books are closed.

The accounts included in this nominal (temporary) account are private accounts, income accounts and expense accounts.

Meanwhile, a permanent account is a company account that is permanent and is never closed even when the books are closed.

Company accounts included in permanent accounts are asset accounts, liability accounts and capital accounts.

It can also be stated that nominal (temporary) accounts are accounts whose value will not be carried over to the next accounting period.

Meanwhile, a permanent account is an account whose value will be carried over or used as the initial balance in the next accounting period. Permanent accounts will experience adjustments in them from year to year.

Stages in Closing a Book

There are four stages carried out when closing a book, namely:

Debit all balances in the income account.
Credit all balances in the expense account.
Transferring the difference between the credit amount and the debit amount to the capital account. At this stage, it can be seen whether the company made a profit or loss. If credit is greater than debit, then the company makes a profit. Conversely, the company loses if the credit is smaller than the debit.
The capital account is debited for the same amount, and if there is a private account, a credit is made according to the final balance.

Account Status at the End of the Fourth Stage

After these four stages have been carried out, the status of the company accounts is obtained as follows:

  • The Asset account will have a DEBIT balance status
  • The Liability Account will have a CREDIT balance status
  • The Capital Account will have a CREDIT balance status
  • Private Accounts (if any) will have a Zero balance
  • The Income Account will have a balance of Zero
  • The Expense Account will also have a Zero balance

What is the Purpose of Closing the Book?

As previously mentioned, companies must close the books at the end of the accounting period. This is because there are goals that will be achieved when the company closes its books.

One of the purposes of a company closing the books is to return the nominal (temporary) account to zero, while the permanent account shows the ending balance, which will be the beginning balance of the next accounting period.

One of the purposes of a company closing the books is to return the nominal (temporary) account to zero, while the permanent account shows the ending balance, which will be the beginning balance for the next accounting period.

In more detail, the purpose of closing the books at the end of a certain accounting period is:

  • Ending financial reports in a certain accounting period
  • When a company closes its books, the financial reports have been completed and there are no more reports for that accounting period.
  • Transferring the balance on a nominal (temporary) account to a permanent account
  • Establish a zero balance on a nominal (temporary) account to start accumulation in the next accounting period
  • Setting the ending balance on a permanent account after transferring a nominal (temporary) account

What is the Function of Closing Books in Accounting?

Apart from the purpose of closing the books as explained above, the functions of closing the books carried out by the company are as follows:

  • Separating nominal (temporary) accounts for the current accounting period from the next accounting period so that recordings in the current accounting period are not combined with the next accounting period.
  • Shows the balance on the nominal (temporary) account according to the final amount of capital reported at the end of the accounting period. The balance on the nominal (temporary) account is not mixed with the balance in the next accounting period.
  • Makes it easier to prepare end-of-year balance reports, namely by looking at the final nominal value for each account obtained after closing the books.
  • Makes it easier for companies to analyze and evaluate the company’s financial condition. By closing the books, you can see how much nominal profit or loss the company earned in the current accounting period. You can also analyze by comparing the financial situation of the current period with the previous period. With this analysis, the company can also evaluate and plan things that must be done for the next accounting period to make it even better.
  • Conveying actual company financial information in a certain accounting period to stakeholders , especially company owners.

Closing Books in Companies: Routine and Mandatory

Closing the books is done so that the company can evaluate the company and at the same time see developments from one period to the next.

This is the basis for decision makers to determine the company’s further direction and development. Therefore, closing the books must be done regularly and regularly.

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