The balance sheet is the process of canceling the accounts of income (consisting of income accounts, expenses, sales costs and production costs) and transfer these figures to account balance respective (assets, liabilities and equity). This closing allows to know the economic result of the period and quantify the gains or losses.
The result of closing the profit and loss accounts 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.
To cancel or close the income statement, 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 implies, 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 equity 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.
According to abbreviationfinder, it is possible that various problems arise with the accounting closing from errors in the records of the movements. Among the most common are entries with wrong values, entries in wrong accounts (entering expenses as income or vice versa) and undocumented operations (such as a purchase without an invoice).
Practical guide to carry out the accounting closing
1) Make a balance to check the sums and balances at the end of the accounting year, which is usually December 31, which returns whether the accounting is square or not. After this first step, if an error is found, it must be resolved before continuing. When using computer programs, it is convenient to check that the mismatches are real and not, the product of technical problems;
2) Review all the general ledger tabs one by one to ensure that there are no accounting errors, such as forgetting to open an amortization account, having entered a value incorrectly or that the balances do not match;
3) The accounts must be adjusted that can modify the result of the accounting profit. The accounts to be analyzed are: inventories, fixed assets, provisions for expenses and risks, impairment of assets, adjustments due to accruals, operations that have been attributed to Equity, amortizations;
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 Corporation Tax Law (this tax is calculated by multiplying the tax rate by the profit for the year).
We are now in a position to complete the year-end; In other words, the four steps described above allow to regularize and close the current year, and to open a new accounting year. It is very important to have a backup of all information, whether it is used on computer media or on paper.
Although there are a large number of IT tools specially designed to assist accountants in completing the year-end, just as in the past there were no alternatives to paper, a good use of spreadsheet applications allows automating the activity without the need to acquire 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.