16 Nov Closing Entries
Closing Entries for Various Business Forms
Although QuickBooks does not have a formal closing process like many other accounting software packages, there are several things to do to protect the integrity of the balances.
The income and expense accounts are automatically “closed” into a special QuickBooks account called Retained Earnings as Balance Sheet reports are generated. It is possible, depending on the type of business entity (i.e. sole-proprietorship, partnership, etc.) to change the name of this account, however, it is not possible to have the calculated balance appear in any other account. If the Retained Earnings account is deleted, for example, the next time a Balance Sheet is calculated, the software will create the account again. This process is not a “hard close” like some packages where you will see an actual entry to zero-out the Profit and Loss accounts, but rather a “soft close” where the Retained Earnings balance is calculated when needed for the Balance Sheet report.
If there are accounts that need to be closed at year end, that are not Profit and Loss accounts, a journal entry will need to be made manually. Some typical examples include: drawing accounts for sole-proprietorships and income allocation entries for partnerships.
Password protecting the data through the date that the books have been reconciled is an important step. This will provide a safeguard where, depending on the level of access of the user, changes will not be permitted, or a warning will appear to provide one last chance to confirm that the change should be made.
Sole proprietors: Change the name of Retained Earnings to Owner’s Equity; create a journal entry to close draw account into Owner’s Equity
Partnership: Create a journal entry to allocate each partner’s portion of current income (i.e. Retained Earnings) to their individual partner account. The result should be a Retained Earnings balance of zero when the Balance Sheet is created.
LLC: Create a journal entry to allocate each member’s portion of current income (i.e. Retained Earnings) to their individual member account. The result should be a Retained Earnings balance of zero when the Balance Sheet is created.