Difficulty level: Beginner
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For the purpose of simplicity, step 3 was combined with step 2 in the previous examples.
Closing the books is the process that closes temporary accounts into retained earnings.
Before the books are closed, accountants have to do a detailed review of all accounts and make sure events that need to be accrued have been recognized on the books.
The closing process could be a very cumbersome process depending on how big the business is. Thousands of events go on in any given day and sometimes it takes time to make sense of it all.
Once all account have been reviewed, the revenue, expense and dividend accounts are closed into retained earnings.
- An increase in revenue causes retained earnings to increase
- An increase in expense/ dividend causes retained earnings to decrease
Once all temporary accounts have been closed to retained earnings, the financial statements are ready to be prepared
See page 81 – 83 for the financial statements
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