Closing the Books in QuickBooks Online

After you have entered all of your business transactions into QuickBooks for the year, you will need to finalize your financial statements so that you can hand them off to your accountant to file your taxes. To ensure you have recorded all business transactions for the financial period, we have included a checklist that you can follow to close your books. Closing your books will ensure that no additional transactions are entered into QuickBooks once you have finalized your financial statements. If you have a bookkeeper or an accountant who manages your books, they should ensure that all of the steps have been completed. In this chapter, we will cover each item on the checklist. This includes reconciling all bank and credit card accounts, making year-end accrual adjustments (if applicable), recording fixed asset purchases made throughout the year, recording depreciation, taking a physical inventory, adjusting retained earnings, and preparing financial...

Reviewing a checklist for closing your books

As discussed, there are several steps you will need to take in order to close your books for the financial period. How often you close your books (for example, monthly, quarterly, or annually) will determine how often you need to complete these steps. Remember the importance of closing your books, as this will ensure that all transactions for the financial period have been recorded and that your financial statements are accurate, which is important because your accountant will use them to file your business tax return.

The following is a checklist of the steps you need to complete in order to close your books. You should complete them in the order presented:

1. Reconciling all bank and credit card accounts
2. Making year-end accrual adjustments
3. Reviewing new fixed asset purchases and adding them to the chart of accounts
4. Making depreciation journal entries
5. Taking physical inventory and reconciling this with...

1. Reconciling all bank and credit card accounts

In Chapter 9, Reconciling Uploaded Bank and Credit Card Transactions, you learned how to reconcile your bank and credit card accounts. It’s important for you to reconcile these accounts before closing the books so that you can ensure that all income and expenses for the period have been recorded in QuickBooks.

This will ensure that your financial statements are accurate and that you don’t miss out on any tax deductions.

2. Making year-end accrual adjustments

If you are on the accrual basis of accounting, you need to make sure that all income and expenses that have been incurred for the period are recorded. As discussed in Chapter 1, Getting Started with QuickBooks Online, accrual basis accounting means that you recognize income when services have been rendered, regardless of when payment is received. The same concept is applied to expenses. For example, if you made a purchase in December but have not yet received the bill for it, you will need to record an adjusting journal entry before you close the books in order to record the purchase. Some examples of accruals that may be required are prepaid expenses and wages. Be sure to consult with your accountant for the proper recording of these transactions. We will discuss journal entries in more detail later in this chapter.

Pro Tip: Record all accounts receivable for the end of the period, which means invoicing all customers for work performed...

3. Reviewing new fixed asset purchases and adding them to the chart of accounts

If you purchased any fixed assets during the year, you should add these to QuickBooks. As mentioned in Chapter 1, Getting Started with QuickBooks Online, fixed assets can be equipment purchased for your business such as computers or printers. Furniture such as a desk or chair are also considered fixed assets. Fixed assets are subject to depreciation, which is a tax-deductible expense. Depreciation is the reduction of the value of a fixed asset due to wear and tear. Tax-deductible expenses can reduce your tax bill, so you want to make sure that you take all of the deductions to which you are entitled. If you have not recorded new fixed asset purchases, then you will not have depreciation expenses recorded, which means you will miss out on what could be a significant tax deduction. It’s also important to conduct a physical check to ensure that all of the assets on the books still exist and have not...

4. Making depreciation journal entries

Depreciation is the reduction in value of an asset due to wear and tear after it has been in service for a period of time. To reflect the reduced value, you must record the depreciation expense in your books. Depreciation is also a tax-deductible expense, which can help to reduce your overall tax liability. After adding fixed assets to QuickBooks, you need to record depreciation expenses for the period. Unfortunately, QuickBooks does not compute depreciation for you. Therefore, you will need to calculate depreciation manually, or have your accountant do this for you. In the Recording journal entries section of this chapter, we will show you how to record journal entries in QuickBooks.

5. Taking physical inventory and recording inventory adjustments

Reconciling inventory involves making sure that the product you have on your shelf matches what your books reflect as on-hand inventory. You should take a physical inventory count at least once a year, if not more often. After taking a physical count, any discrepancies between the books and the physical count should be recorded in QuickBooks as inventory adjustments. After recording these inventory adjustments, your books and your warehouse will be in sync.

Follow these steps to record inventory adjustments in QuickBooks:

1. Click on the + New button and select Inventory qty adjustment in the Other column, as indicated in Figure 15.5:

Figure 15.5: Choosing Inventory qty adjustment

2. Complete the fields for the inventory adjustment, as indicated in Figure 15.6:

   

   Figure 15.6: Completing the fields to record the inventory adjustment

   The following is a brief explanation of the...

6. Adjusting retained earnings for owner/partner distributions

Retained earnings are the cumulative amount of your income and expenses for the prior period(s). This amount will post to the retained earnings account after the end of your fiscal/calendar year has been closed. QuickBooks will automatically make this entry for you. Depending on the type of organization (Corporation, partnership, llc, sole proprietorship, or non-profit), you may need to move this balance to other equity accounts.

To distribute profits to the owners, you will need to create a journal entry to an equity account entitled owner’s draw or owner distributions and offset it with retained earnings. Be sure to consult with your CPA or tax preparer if you are not familiar with this process.

To summarize what we have covered so far, many of the steps in the closing process are designed to review the transactions that have been recorded throughout the fiscal year and make adjustments as needed for...

Recording journal entries

A journal entry is used to adjust your books for transactions that have not been recorded throughout the year. Depreciation expense for fixed assets, income and expense accruals, and adjustments to retained earnings are three examples we have discussed in this chapter.

Follow these steps to record a journal entry in QuickBooks:

1. Click the + New button and select Journal entry, as indicated in Figure 15.7:

Figure 15.7: Selecting Journal entry below the Other column

2. A screen will appear similar to the one shown in the following screenshot:

   

   Figure 15.8: Journal Entry template

   The following is a brief explanation of the fields that need to be completed in order to record a journal entry:

   • Journal date: Enter the effective date of the journal in this field.
   • Journal no.: QuickBooks will automatically populate this field with the next available journal number. If this is the first journal entry...

7. Setting a closing date and password

In an effort to maintain the integrity of your data, you should set a closing date and password after you have entered all transactions for the closing period. By setting a closing date, users will receive a warning message if they attempt to enter transactions that affect the closing period. For example, if you set a closing date of 12/31/22, users will receive a warning message if they attempt to enter any transactions dated 12/31/22 or prior.

Follow these steps to set a closing date and password in QBO:

1. Click on the gear icon and then select Account and Settings in the Your Company column, as indicated in Figure 15.9:

Figure 15.9: Selecting Account and Settings in the Your Company column

2. Click on the Advanced tab, as indicated in Figure 15.10:

Figure 15.10: Clicking the Advanced option

3. The Accounting preferences are located at the very top of the next screen, as indicated in...

8. Preparing key financial reports

After you have completed the first seven steps in the closing checklist, you are ready to prepare financial statements. There are three primary financial statements you will need to prepare:

• The trial balance
• The balance sheet
• The income statement (profit and loss report)

In Chapter 11, Business Overview Reports, you learned what the balance sheet and income statement reports are, how to interpret the data, and how to generate these reports in QuickBooks. Your accountant, or certified public accountant (CPA), will also request a trial balance report. A trial balance report lists all of the debits and credits recorded in QuickBooks for the period. If everything has been recorded properly, debits will always equal credits on this report.

Follow these steps to run a trial balance report in QuickBooks:

1. Navigate to Reports, as indicated in Figure 15.12:

Figure 15.12: Clicking Reports to navigate...

Giving your accountant access to your data

If you have an accountant or tax preparer to whom you need to grant access to your data, you can create a secure user ID and password for them. All you need to do is request their email address so that you can send them an invitation to access your data.

Follow these steps to invite an accountant to access your QuickBooks data:

1. Click on the gear icon and select Manage Users in the Your Company column, as indicated in Figure 15.16:

Figure 15.16: Selecting Manage Users from the Your Company column

2. On the Manage users page, click on Accounting firms, as indicated in Figure 15.17:

Figure 15.17: Clicking on Accounting firms

3. Enter your accountant or tax professional’s email address and click on Invite, as indicated in Figure 15.18, to invite your accountant to access your QuickBooks data:

   Figure 15.18: Clicking the Invite button

   Your accountant will receive an...

Summary

In this chapter, you have learned about the key tasks that need to be completed to close your books for the accounting period. As discussed, you need to reconcile all bank and credit card accounts, record year-end accrual adjustments (if you are on the accrual basis of accounting), add fixed asset purchases, record depreciation expenses, take a physical inventory and make the necessary adjustments, adjust retained earnings for distributions made to the business owners, set a closing date and password, and prepare key financial statements. You can perform these tasks yourself, or you can give your accountant access to your QuickBooks data to take care of this for you.

This chapter is the last one that covers the QuickBooks features most small businesses will use. Congratulations on successfully completing all of the chapters thus far. In the next chapter, we will cover some additional topics, such as adding apps to QBO, managing credit card payments, and recording bad debt...