After financial statements have been prepared and reviewed, it's time to perform the final step of the accounting cycle—Closing the Books. This crucial step resets certain account balances so the business can start fresh in the next accounting period.


What Does It Mean to "Close the Books"?

Closing the books involves making closing entries to transfer the balances of all temporary accounts (like revenues, expenses, and drawings) into permanent accounts (usually the owner's capital or retained earnings).

The goal is to reset temporary accounts to zero so that the new accounting period begins with a clean slate.

Why Is Closing the Books Important?

  • Prepares the accounts for the next Period
  • Separates financial performance by Period
  • Updates the owner’s equity to reflect the Period's activity
  • Ensures accurate tracking of future income and expenses

Without closing the books, prior period figures would mix with the current period, leading to confusion and inaccurate reporting.