Closing the Year in QuickBooks®

By Douglas Sleeter and Joe Woodard

In this article:

At the end of each year, QuickBooks automatically enters an adjusting entry to your income and expense accounts, posting the net income into Retained Earnings (or Owner’s Equity). This entry is known as the closing entry.

In fact, QuickBooks never really creates a transaction for the closing entry, but when you create a Balance Sheet, QuickBooks calculates the balance in Retained Earnings by adding together the total net income for all prior years. At the end of each fiscal year (determined by the “First month in your fiscal year” field in the company information screen), QuickBooks automatically transfers the net income into Retained Earnings.

On the left side of the example in Table 1, notice that the Balance Sheet for 12/31/2001 shows net income for the year is $100,000.00. The right side shows the same Balance Sheet, but for the next day January 1, 2002). Since January is in a new year, last year’s net income has been automatically transferred to the Retained Earnings account.

There are two advantages to QuickBooks’ automatically closing the year for you. First, you don’t have to create the year-end entry, which can be time-consuming. Second, the details of your income and expenses are not erased each year, as some programs require.

Closing the Accounting Period

Following is a list of actions you should take at the end of each accounting period. Perform these steps as often as you close your company’s books. Many companies close monthly or quarterly, while some close yearly. No matter when you close, these steps are meant to help you create proper reports that incorporate many noncash transactions, such as depreciation entries, prepaid expense allocations, and adjusting entries to equity accounts, to properly reflect that the books are closed.

At the end of the year, consider doing some or all of the following:

1. Enter depreciation entries.
2. Reconcile cash and loan accounts with the year-end statements.
3. If your business is a partnership, enter a General Journal Entry to distribute net income for the year to each of the partner’s capital accounts. If your business is a sole proprietorship, enter a General Journal Entry closing Owner’s Drawing and Owner’s Investments into Owner’s Equity.
4. Run reports for the year and verify their accuracy. Enter adjusting entries as necessary and rerun the reports.
5. Print and file the following reports as of your closing date: General Ledger, Balance Sheet Standard, Statement of Cash Flows, Inventory Valuation Summary, and Profit & Loss Standard for the year.
6. Back up your data file on a special backup diskette, zip disk, or CD ROM that will never be touched.
7. Set the closing date to the last day of the period you are closing. See below for details on setting the closing date.
8. Consider condensing the data file. This is often a bad idea so be careful with condensing. Condensing might remove critical information you need, and it might not remove data you no longer want to keep in the data file. This topic will be covered in more depth in another article.

Recording Closing Entries for Sole Proprietorships and Partnerships

If your company is a sole proprietorship or partnership, the owners of the company put money into the company and occasionally take money out. Owners are not employees, so you won’t use payroll to pay the owners.

Sole proprietorships have the following accounts in the Equity section of the Chart of Accounts (see Figure 1).

Figure 1 - Sample Equity Section - Sole Proprietorships

Partnerships have the following accounts (or similar accounts) in the Equity section of the Chart of Accounts (see Figure 2).

Figure 2 - Sample Equity section - Partnerships

Throughout the year, as owners put money into and take money out of the business, you’ll add transactions that increase and decrease the appropriate equity accounts. In a sole proprietorship, you’ll use the Owner’s Investments and Owner’s Drawing accounts. In a partnership, you’ll use the Drawing and Investment accounts for each partner.

To record owner’s investments in the company, enter a deposit transaction in your Checking account (or the account to which you deposit), and enter “Owner’s Investments” in the From Account field (see Figure 3).

Figure 3 - Record owner’s investments in the Make Deposits screen

To record owner’s withdrawals from the company, enter a check transaction in the Checking account (or the account from which the owner draws money), and enter “Owner’s Drawing” in the Account field (see Figure 4).

Figure 4 - Record owner’s withdrawals as a check transaction

At the end of each year, you’ll create a General Journal Entry to zero out the Owner’s Drawing account and close it into Owner’s Equity (see Figure 5).

Figure 5 - General Journal Entry to close Owner’s Drawing

To find the amounts for this General Journal Entry, create a Trial Balance report for the end of the year. Note the balance in the Owner’s Drawing account and use this balance on a General Journal Entry to close the account. For example, if your Trial Balance shows a debit balance of $5000.00 in Owner’s Drawing, enter $5000.00 in the credit column on the Owner’s Drawing line of this General Journal Entry. Then enter the necessary debit or credit to the Owner’s Equity account to make the entry balance.

To close the Partner’s Draws accounts into each Partner’s Profits account, use a General Journal Entry like the one shown in Figure 6. Use the same process explained above to get the numbers from the year-end Trial Balance.

Figure 6 - General Journal Entry to close partner’s drawing accounts

Distributing Net Income to Partners

With partnerships, you need to use a General Journal Entry to distribute the profits of the company into each of the partner’s profit accounts. After making all adjusting entries for depreciation, prepaid expenses, and any other accounts, create a Profit & Loss report for the year. Use the Net Income figure at the bottom of the Profit and Loss report to create the General Journal Entry, in Figure 7. In this example, assume the shown net income for the year is $50,000, and that there are two equal partners in the business.

Note that this General Journal Entry uses Retained Earnings for the debit. That’s because QuickBooks automatically closes net income into Retained Earnings each year. So this is the entry you’ll make each year to distribute the net income to the partners.

Also, note that the General Journal Entry is dated January 1. That’s because there is no “after-closing” Balance Sheet in QuickBooks. We want the December 31 Balance Sheet to show “undistributed” net income for the year, but if this General Journal Entry were made on December 31, you would never be able to see a proper December 31 Balance Sheet. Therefore, to preserve the 12/31 Balance Sheet, use January 1 for this closing entry. If you ever want to see an “after closing” Balance Sheet, use January 1 for that Balance Sheet. It would be best to date all normal business transactions for January 1 as of January 2, and use January 1 exclusively for these “closing” entries.

Figure 7 - Use a General Journal entry to distribute partner’s profits

Setting the Closing Date to “Lock” Transactions

QuickBooks allows you to set a closing date that effectively locks the file so that no one can make changes to the file on or after a specified date.

To set or modify the closing date and closing date password, follow these steps:

Step 1.      Select the Company menu and then choose Set up Users.

Step 2.      If you haven’t set up an Administrator for the file yet, enter a user name in the Administrator’s Name field. Enter a password in the Administrator’s Password and Confirm Password fields  (see Figure 8). Click OK.

Figure 8 - The Set up QuickBooks Administrator screen

Step 3.   Click Closing Date in the User List screen (Figure 9).

Clicking Closing Date opens the Accounting Company Preferences screen that includes a Closing Date section.

Figure 9 - Access the Closing Date button from the User List screen.

Step 4.     Enter 12/31/2001in the Date through which books are closed field (see Figure 10).

The date you enter specifies that all transactions dated on or before that date are “locked.” QuickBooks disallows additions, changes, or deletions to any transactions with a date on or before this date.

Tip
The user’s set up affects his or her ability to add, change or delete closed (“locked”) transactions. When setting up new users, always choose the setting that prevents them from making additions, changes or deletions to transactions recorded on or before the closing date. Unless the Closing Date Password is set, the Administrator of the file can always bypass the closing date with a simple warning screen. To better protect the closing date in your QuickBooks file, require all users, including the Administrator, to enter a Closing Date Password.

Step 5. Click Set Password.

Step 6. Enter the password text in the Password and Confirm Password fields. Then click OK on the Preferences screen and Close on the User List screen.

QuickBooks will now require all users to enter this password when attempting to add, change or delete transactions dated on or before the Closing Date.

Copyright © 2002, The Sleeter Group, Inc.