How to close a financial year

Wed May 24 23:44:02 EDT 2017

> On May 24, 2017, at 9:56 PM, doncram <doncram at gmail.com> wrote:
> 
> Thank you to David T. and to Michael D Novack and others for observations
> on closing.  Ideas from these and other comments that I can look for in
> past ("annual") discussions oughta be incorporated into documentation.
> Some notes while this is fresh:
> 
> *Annual discussions, true "frequently asked questions" --> opportunity to
> improve documentation
> 
> *The Tutorial and Concept Guide does not address closing at all, if I am
> not mistaken...it should be covered in Chapter 13 about businesses and it
> also should be covered in closing for personal finances
> 
> *The Wiki coverage (http://lists.gnucash.org/wiki/Closing_Books) is
> alarming to me in the difference of its terminology from that of
> introductory accounting textbook treatment of the topic...it suggests the
> purpose of closing is to zero out account balances or to "zero
> transactions". I need to review textbook treatment myself, but what's
> needed in explanation to regular users is a discussion of all the usual
> aspects, starting with making adjusting entries -- a huge theme in chapter
> after chapter of textbooks (e.g. recognize accrued interest in mortgages,
> loan & bond liabilities and assets, for one i didn't mention yet).  Provide
> example journal entries of each type.
> 
> *Then go through discussion of all the logical steps of closing in a manual
> system or in big commercial accounting software, and how you can
> approximate that in GnuCash (e.g., as suggested, make a point of backing up
> the data and securely storing/distributing it).
> 
> *Note freezing is not the same...the prior years data stays in your system,
> and if it is not frozen then errors can be introduced, you might
> accidentally add or change a prior year transaction.  In commercial
> standard accounting, the past data is locked by password at least, and
> prior year info is only changed in exceptional circumstances (explain
> those...and how even for public restatements of financials, the past info
> is likely not changed).
> 
> *I still am gathering that password-locking the past period data is not
> possible.
> 
> *Both the Wiki and the Help coverage use incorrect-to-my-ears language
> about the Chart of Accounts, both saying that the Chart of Accounts will
> show amounts of some kind.  GnuCash usage should be brought into conformity
> with accounting usage where the Chart of Accounts is a list of the account
> names and account numbers and account types only;  it does not have any
> dollar amounts.  The GnuCash usage is referring to what I would call Trial
> Balances i think.

I think the way the Chart of Accounts is currently presented could be very useful. It is helpful to see at a glance what the current balance of any particular account is without opening its register. This has no direct paper analogy, nor does it need to. If the idea is to live within the limitations of paper books, then just use paper books.

The CoA could be MORE useful if the expense and income accounts had the option to be set as ‘current accounting period’ or something similar. Having them set to whatever arbitrary (or not) opening date in history is certainly less meaningful, at least for me. Now for assets and liabilities, a current balance from the beginning of the book IS useful as a trial balance sheet would be.

I use another application for a business that takes the approach you described for its chart of accounts. Pretty pointless and much less functional in my opinion. It was a set once and forget it sort of thing. The GnuCash approach has much more utility.

The way I think of it, the Accounts tab serves the function of a Chart of Accounts, but it was intended and is so much more. Is there really a need to have a separate, otherwise information only, non-functioning list of accounts? How is that an improvement or a benefit?

Just my 2¢,

Adrien

> 
> *What is the goal in closing?  I think it is about bringing the state of
> financial reporting into a "good state", e.g. where the Balance Sheet and
> the Income Statement/Statement of Revenues and Expenses are accurate in
> accordance with your organization's or your personal accounting standards,
> perhaps U.S. Generally Accepted Accounting Principles perhaps with
> modifications, or perhaps compliance with Tax filing (or both).  Perhaps it
> is cash basis.  What your nonprofit's board or independent accountant will
> likely accept.  An individual may want their accounting to match tax filing
> (close but not same as cash basis), e.g. use depreciation per tax standards
> rather than GAAP, which is a choice.   The goal could be to accurately
> state your income as will match on tax forms.  A number of adjusting
> entries are needed, and once a year perhaps is good for considering
> revaluations of property, etc.  Side note: for U.S. personal taxes if you
> deduct car usage for personal business usage according to mileage at
> allowable rate, that means that you need to make an accrual, an adjustment,
> relating to difference between that vs. your "actual" car expenses.  The
> Tutorial and Concept Guide treatment should start with the goal(s) you can
> have.
> 
> I gather I should submit a bug through Bugzilla to address changes for the
> Manual and changes for the Tutorial and Concept Guide. Presumably I could
> just edit the Wiki section directly.  I don't yet understand how the Wiki
> is supposed to relate to the other documentation. Maybe the Wiki is to
> cover stuff not yet in the "formal" documentation (the Manual and the
> Guide, which are harder to change)?  --cheers, Don
> 
> 
> 
> On Wed, May 24, 2017 at 3:01 PM, Mike or Penny Novack <
> stepbystepfarm at dialup4less.com> wrote:
> 
>> On 5/24/2017 10:46 AM, doncram wrote:
>> 
>>>  .......  What is meant by "closing" in GnuCash-jargon seems different
>>> than what is meant more usually in accounting.
>>> I............
>>> 4. Freezing forever the accounts for the period (in software, this would
>>> be
>>> done by putting a lock on any transactions before the new period)
>>> 
>>> I am guessing that GnuCash does not support #4.
>>> I gather that in GnuCash, #2 and #3 don't need to be done, because the
>>> income statement report already exists.
>>> 
>> a) The intermediate steps once used in pen and ink on paper accounting are
>> indeed redundant and can be skipped
>> 
>> b) No, #4 is EASY. Your confusion is in forgetting that in old fashioned
>> pen and ink on paper accounting this was done by putting the old journal
>> and ledger volumes away when the volumes for the new period began. You do
>> the SAME THING with gnucash if you wish. I suspect that the reason you
>> didn't "see it" is you were expecting a "button to push"? (within gnucash)
>>   1) To make a file unalterable, you make a copy of that file onto read
>> only medium.
>>   2) Making copies of files is something you ordinarily do outside of
>> applications. How are you now making backups? This is just a special sort
>> of backup (one on medium that makes it read only).
>> 
>> When I am doing this for one of the organizations for which I keep books,
>> I do a pre-close backup (after adjusting entries like depreciation but
>> before closing income and expense accounts to equity) and a post close
>> backup, burn copies to CDROM (or DVDROM) and among other things, make sure
>> some other officer of the organization gets copies. You do the "Income
>> Statement" (well "Statement of Revenues and Expenses" as my organizations
>> are non-profits) in the pre-close and the "Balance Sheet" either.
>> 
>> 
>> 
>> Michael D Novack
>> 
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