How to Transition Into a New Accounting Cycle
You certainly don’t want to close the doors of your business as you transition into a new accounting cycle and prepare all your year-end reports, such as the financial statements and governmental reports. After all, that can be a two- to three-month process. So you need to continue making entries for the new year as you close the books for the previous year.
If you prepare your business’s accounting books manually, you probably need easy access to two sets of books: the current year and the previous year.
Keep in mind the following when dealing with your business’s accounts at year-end:
If you keep your books using a manual bookkeeping system, you start new journal pages for each of the active accounts. If you have some accounts that aren’t very active, rather than start a new page, you can leave some space for adjustments or corrections, draw a line, and start the transactions for the new year on the same page.
If you keep your books using a computerized accounting system, you can zero out the necessary accounts to start the new year while leaving the data for the previous year in the password-protected, closed accounts. You can still make changes to those closed accounts, but access is limited to people who know the password.
Part of closing out your books is starting new files for each of your accounts. Most businesses keep two years of data, the current year and the previous year, in the on-site office files and put older files into storage. As you start a new year, box up your two-year-old files for storage and use the newly empty drawers for the new year’s new files.
For example, suppose you’re creating files for 2012. Keep the 2011 files easily accessible in file cabinet drawers in your office, but box up the 2010 files for storage. Then keep your 2012 files in the drawers where the 2010 files had been.
You may find that you need to access some files regularly and therefore don’t want to put them in storage. Pull out any files related to ongoing activity and keep them in the office so you don’t have to run to the storage area every time you need the files. For example, if you have an ongoing legal case, you should keep any files related to that matter out of storage and easily accessible.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
