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After doing the four bookkeeping procedures we explain in the preceding section, the business is ready to finish the process. At the end of the period, certain steps are necessary to make the business’s accounts ready for the preparation of its financial statements (and other accounting reports such as tax returns). We continue the numbering from the preceding section, so we start with Step 5:

1 Perform end-of-period procedures — the critical steps for getting the accounting records up to date and ready for the preparation of management accounting reports, tax returns, and financial statements.A period is a stretch of time — from one day (even one hour) to one month to one quarter (three months) to one year — that is determined by the needs of the business. A year is the longest period of time that a business would wait to prepare its financial statements. Most businesses need accounting reports and financial statements at the end of each quarter, and many need monthly financial statements. Before accounting reports can be prepared at the end of the period, the bookkeeper needs to bring the accounts of the business up to date and to complete the bookkeeping process. Generally these end-of-period procedures consist mainly of making adjusting entries in the accounts of the business. One such end-of-period adjusting entry, for example, is recording depreciation expense for the period (see Chapters 6 and 7 for more on depreciation). Another is taking an actual count and making a critical inspection of the business’s inventory so that the inventory records can be adjusted to recognize any shoplifting, employee theft, and other inventory shrinkage.The accountant needs to be heavily involved in end-of-period procedures and be sure to check for errors in the business’s accounts. Data-entry clerks and bookkeepers may not fully understand the unusual nature of some business transactions and may have entered transactions incorrectly. One reason for establishing internal controls (discussed in the later section “Enforcing Strong Internal Controls”) is to keep errors to a minimum. Ideally, accounts should contain very few errors at the end of the period, but the accountant can’t make any assumptions and should make a final check for any errors that may have fallen through the cracks.

2 Compile the adjusted trial balance, which is the accountant’s basis for preparing management reports, tax returns, and financial statements.After all the end-of-period procedures have been completed, the bookkeeper compiles a comprehensive listing of all accounts, which is often called the adjusted trial balance. Modest-sized businesses maintain hundreds of accounts for their various assets, liabilities, owners’ equity, revenue, and expenses. Larger businesses keep thousands of accounts, and very large businesses may keep more than 10,000 accounts.In contrast, external financial statements and tax returns contain a relatively small number of accounts. For example, a typical external balance sheet reports only 25 to 35 accounts (maybe even fewer). Apple’s consolidated September 26, 2020, end-of-fiscal year balance sheet contains just 27 accounts, including totals. (Apple’s 2020 10-K annual report to the Securities and Exchange Commission includes more accounts.) The annual income tax return (Form 1120) for business corporations contains a relatively small number of accounts.The accountant takes the adjusted trial balance and telescopes similar accounts into one summary amount that is reported in a financial report or tax return. For example, a business may keep hundreds of separate inventory accounts, every one of which is listed in the adjusted trial balance. The accountant collapses all these accounts into one summary inventory account that’s presented in the balance sheet of the business. In grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.

3 Close the books — bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process all over again for the coming fiscal year.Books is the common term for a business’s complete set of accounts. (Well, okay, we should include journal entries in the definition of books, but you get the point.) A business’s transactions are a constant stream of activities that doesn’t end tidily on the last day of the year, which can make preparing financial statements and tax returns challenging. The business has to draw a clear line of demarcation between activities for the year (the 12-month accounting period) ended and the year yet to come by closing the books for one year and starting with fresh books for the next year.

Most medium-sized and larger businesses prepare an internal accounting manual or set of policies and procedures that spells out in great detail the specific accounts and procedures for recording transactions. A business should regularly review its chart of accounts and accounting rules and policies and make revisions. Companies do not take this task lightly; discontinuities in the accounting system can be major shocks and have to be carefully thought out. Nevertheless, bookkeeping and accounting systems can’t remain static for very long. If these systems were never changed, bookkeepers would still be sitting on high stools making entries with quill pens and bottled ink in leather-bound ledgers.