Accurate Accounting Institute of Azar Accountants:
How to close accounts at the end of the financial year
One of the important duties of accountants is to perform the operations at the end of the financial period (year).
The reason for closing the financial year in accounting is to calculate profit and loss and compare the annual performance of companies. Also, reports related to income, profit and loss and tax calculation by the Ministry of Finance are calculated in one-year periods.
Before closing the financial year, we must first identify the types of accounts. In dotcom double or two-way accounting, a group of permanent or balance sheet accounts and a group of temporary or profit and loss accounts.
Permanent or balance sheet accounts: Accounts whose balance is not related to a financial period and is transferred to the next financial periods are balance sheet or permanent accounts. such as bank accounts, trade debtors, trade creditors, etc.
Temporary or profit and loss accounts: accounts whose balance is related to a financial period. The balance of these accounts becomes zero at the end of a financial period and is not transferred to the next financial period. such as expense accounts, income, sales, etc.
Steps to close the financial year
1- Document for closing temporary accounts: To close a financial period, one must first register all the documents related to that financial year and ensure their correctness. Then, in one document, we debit all the temporary accounts that have a credit balance equal to the amount of the account balance and make their balance zero. Then we credit all the temporary accounts that have a debit balance equal to the balance of the same account. To balance this document, the current profit and loss account must be used, that is, the balance of all temporary accounts, profit and loss, will be current. This is why temporary accounts are also called profit and loss accounts.
2- Profit and loss document: After determining the profit and loss, a document is usually issued in which the assignment of current profit and loss is specified, that is, it is transferred to the accumulated profit and loss account.
3- Closing document: In the closing document, all the accounts that still have a balance are also zeroed, due to the balance of all accounts, this document is also a balance without using the intermediary account, but according to taste, the closing balance document can be used from the intermediary account. also used This account is credited with the Riyal equivalent of the debited accounts, and the Riyal equivalent of the debited accounts is credited. In terms of Rials, the debit and credit amounts of this account are equal. As a result, the balance will be zero.
4- Opening document: The balance of all permanent accounts at the beginning of each financial period is specified in this document. This document is exactly the same as the closing document of the previous financial period, with the difference that all the debtor amounts will be credited and all the creditor amounts will be debited.
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In some countries, including Iran, according to the current laws and regulations, it is forbidden to use unfinished books of the previous year or years to record the financial operations of the following year, and institutions are required to register and seal new books for each year to keep their accounts (Article 17). and Clause S of Article 20 of the Implementation Regulations of Note 1 of Article 95 of the Direct Taxes Law).
It is not practical to directly transfer the balance of permanent accounts from one year to the next year, and for this purpose, two intermediary accounts called the closing balance and the opening balance are used to transfer the balance of the same accounts to the next year’s books.
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This post is written by mda140