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Accounting Instruction Reference #400

The Closing Process
Sprecher: Bob Steele CPA
Spieldauer: 3 Std. und 34 Min.

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In this audiobook, we will explore the accounting closing process, the final process in the accounting cycle, the critical process needed to prepare for the next accounting period, and a process often misunderstood. 

The closing process can seem less exciting than other areas of the accounting process. With the main event of the financial statements already having taken place, the closing process is similar to cleaning up peanut shells, popcorn, and candy after a big game. The closing process is very important to understand, however, because it deals with cutoff dates, with the clear lines that need to be drawn from one accounting period to the next. 

Like a baseball scoreboard, the accounting scoreboard needs to be reset for the new game, the new period, or the new year. Runs scored in the prior game cannot be counted on the current scoreboard, and revenue earned in the prior year cannot be counted on the current year's financial statements. Also, runs scored in the current game should not be counted on the scoreboard of the following game, and expenses incurred this year should not be counted on next year's financial statements. 

Unlike a baseball game, the line between accounting periods can be less clear. The accounting department needs to be more vigilant in making sure the accounts that keep score, those that track performance, including the temporary accounts of revenue and expenses, are accumulating data related to the correct period. 

How does an accounting department make sure they are keeping score properly, you might ask? How does an accounting department make sure they are allocating revenue and expenses to the correct period? 

The accounting department must have a strong understanding of when revenue and expense should be recognized and a firm grasp of accrual concepts, including the revenue recognition principle and the matching principle. The accounting department must also understand the closing process. 

In our journey through an understanding of the closing process, we will start out with a review of what the accounting process is, including the main components of the accounting process, the normal journal entries, the adjusting journal entries, and the financial statements.

After reviewing the accounting process, we will discuss the need for the closing process and the goals that a closing process are aimed at achieving. Then we will analyze the closing process using different approaches, approaches which will differ in technique but arrive at the same goal, approaches which will emphasize the reasoning for the closing process. 

©2017 Bob Steele CPA (P)2018 Robert (Bob) Steele CPA

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