Closing Process in Business Accounting

Why do companies need to close their books at the end of a financial period?

Choose the correct analogy for the closing process in business accounting:

(a) A scoreboard for an athletic event

(b) A record book of a sports team

Answer:

The correct analogy for the closing process in business accounting is option (a) A scoreboard for an athletic event.

One of the reasons for which companies need to close their books is to determine the financial performance of the business during the period.

At the end of every financial period, the company has to summarize all financial transactions that have occurred during that period, and the financial statements should match with the records of the company. The process of closing the books starts by closing the revenue and expense accounts that the company has used during that period.

An analogy between the revenue and expense accounts of a business and a scoreboard for an athletic event can be made because it can become confusing if a scoreboard does not get cleared before the start of a new game. If a scoreboard is not cleared, it would be difficult to determine the scores of the current game.

Hence, a scoreboard is cleared before the start of a new game. In the same way, the company needs to close its accounts at the end of a particular period to determine the financial performance of the business during that period.

Another example is the analogy between a sports team's record book and retained earnings. A sports team keeps track of all the games that it has played in its record book. In the same way, the company keeps track of all the earnings and profits that it has made during a particular period.

At the end of every financial period, the company needs to close its accounts to determine the retained earnings. Retained earnings are the amount of money that is left after all the expenses have been paid. If the company doesn't close its books, the earnings will not be added to the retained earnings account, which will make it difficult for the company to determine its financial position.

In conclusion, it is necessary for a company to close its books at the end of a financial period to determine its financial performance during that period. It is similar to clearing a scoreboard before the start of a new game or maintaining a record book to determine the performance of a sports team.