You’re probably thinking that proving out the books sounds like a huge task that takes lots of time. You’re right — it’s a big job, but it’s also a very necessary one to do periodically so you can be sure that what’s recorded in your accounting system realistically measures what’s actually going on in your business.
With any accounting system, mistakes can be made, and, unfortunately, any business can fall victim to incidents of theft or embezzlement. The only way to be sure that none of these problems exist in your business is to periodically prove out the books.
The process of proving out the books is a big part of the accounting cycle. The first three steps of the accounting cycle — recording transactions, making journal entries, and posting summaries of those entries to the General Ledger — involve tracking the flow of cash throughout the accounting period. All three steps are part of the process of recording a business’s financial activities throughout the entire accounting period.
The rest of the steps in the accounting cycle are conducted at the end of the period and are part of the process of proving out the accuracy of your books. They include running a trial balance, creating a worksheet, adjusting journal entries, creating financial statements, and closing the books. Most businesses prove out their books every month.
Of course, you don’t want to shut down your business for a week while you prove out the books, so you should select a day during each accounting period on which you’ll take a financial snapshot of the state of your accounts. For example, if you’re preparing monthly financial reports at the end of the month, you test the amount of cash your business has on hand as of that certain time and day, such as 6 p.m. on June 30 after your store closes for the day.
The rest of the testing process — running a trial balance, creating a worksheet, adjusting journal entries, creating financial statements, and closing the books — is based on what happened before that point in time. When you open the store and sell more products the next day and buy new things to run your business, those transactions and any others that follow the point in time of your test become part of the next accounting cycle.