How to close a financial year

[Derek Atkins]

doncram <doncram at gmail.com> writes:

> The advice to Anita to close a year's books, with warning present in the
> that doing so will destroy usability of reports henceforth, is quite
> alarming!  What is meant by "closing" in GnuCash-jargon seems different
> than what is meant more usually in accounting.

AFAIK all the reports properly handle the Close Books tool.

> In an entirely manual accounting, closing the books at the end of year or
> other period involves several steps:
> 1. Recognize accruals (non-cash entries) such as:
> **depreciation
> **allowance for bad debt (uncollectible accounts)
> **accrue payroll liabilities (assuming payroll date was not at the end of
> year, some liability of salaries and benefits needs to be accrued
> **accrue tax liabilities
> **other adjusting entries (to adjust assets and liabilities)
> 2. Make journal entries transferring expense and revenue account balances
> to income statement summary accounts, i.e. generating an income statement
> 3. Close the income statement summary accounts to retained earnings
> 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.  And if they are done anyhow then
> usability of reports will be destroyed.  A user wants to be able to
> generate reports from prior years, e.g. for making comparisons.
> About #1, advising Anita how to proceed would require some more information
> on what the current balance sheet shows and what assets and liabilities
> need to be updated.

The current tool just rolls up all the Income and Expense accounts into
Equity, basically zero-izing the Income and Expense accounts in the CoA
for the new period.  That's all it does.  It's useful if you want your
Income/Expense CoA balances to show the "current period" balance instead
of "since inception" balances.  And no, it's not required because all
the reports will properly deal with the behavior with or without closing
the books.

You're correct that GnuCash does not support #4, and indeed no piece of
software with a writeable database can.  Those that claim to do so are
lying; what they mean is that you cannot do it through the UI, but that
doesn't mean you cannot do it.

> Anita, does this begin to help?  And could anyone else clarify?  I
> personally am willing to help update the GnuCash documentation about
> closing, as this is important!
>
> cheers, Don

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-derek

-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available