Close Out Revenue and Expense Accounts in QuickBooks 2012
What happens to revenue and expense accounts at the end of the year? Traditional manual accounting systems and QuickBooks 2012 work differently, and you'll need to adjust accordingly.
The following table shows the trial balance for a business at the end of the day of operation.
|S. Nelson, capital||1,000|
|Cost of goods sold||3,000|
The traditional close
Revenue and expense accounts count revenue and expenses for a particular period of time. For example, revenue and expense accounts may count for the month, the quarter, or the year.
One of the things that accounting systems traditionally do is zero out the revenue and expense accounts at the end of the year. This makes sense if you think about it a bit. You want your counters reset at the beginning of the year, so counting the new year’s revenues and the new year’s expenses is easy.
In the case of a trial balance like the one shown, for example, you would typically make the journal entry that follows:
|Cost of goods sold||3,000|
If you look at Journal Entry 19, for example, you see that the first line in the journal entry is a $13,000 debit for sales revenue. If you look back at the trial balance, you see that sales revenue has a $13,000 credit balance. The combination of the account balance shown and the closing entry shown in Journal Entry 19 effectively zeros out the sales revenue account.
The same sort of accounting magic occurs for each of the other expense accounts shown in the trial balance. The cost of the goods sold balance is equal to a $3,000 debit and is zeroed out in Journal Entry 19 with a $3,000 credit. And so it goes.
The QuickBooks close
The sort of accounting taught at local community colleges makes just the sort of closing entry shown in Journal Entry 19. However, you actually don’t need or even want to make such a closing entry within QuickBooks.
The closing entry shown in Journal Entry 19 gets made in a manual system so that the revenue and expense accounts can be reset to zero. In comparison, QuickBooks, relying on the power of the computer, doesn’t need to have these accounts reset to zero in order to correctly calculate the revenue and expense for the new accounting period.
QuickBooks, as you discover throughout this book, can calculate revenue or sales for any period and for any interval of time by using its report generation tool to summarize revenues and expenses that occur within a particular time interval.
This seemingly missed step doesn’t cause any idiosyncratic behavior on the part of QuickBooks. QuickBooks lumps the revenue and expenses from all the previous years into a retained earnings amount reported on the balance sheet.
Net income for the current year is also reported in the equity portion of the balance sheet. In addition, if you have a corporation, QuickBooks typically includes a dividends paid account in the equity portion of the balance sheet.
This seemingly critical textbook journal entry for closing out revenue and expense accounts isn’t made within QuickBooks. This is okay because QuickBooks doesn’t need to make the traditional closing entry.
You may want to ask your accountant about this. By convention, however, any dividends paid by a corporation are typically zeroed out or combined with retained earnings at the end of the year. If you want to combine dividends paid for the current year with accumulative retained earnings, you do this with a journal entry.
The journal entry credits the dividends paid account and debits retained earnings for the amount of dividends paid for the year. Before you make this journal entry, consult your tax advisor.