Closing Out Previous Years
In QuickBooks, all profits are closed out to Retained Earnings/Member Equity at the end of each tax year. This allows a fresh start with new revenues & expenses for tax reporting for the new year.
Much like your payroll from your job, the government wants to know your earnings for each year so they can ascertain the taxes that you owe. What happens if you did not accurately report last year’s profits/earnings and you had to make an adjusted filing later on? Not much of a problem so far, but what if this triggers an audit by the IRS? No problem! You have your hard copies of documents along with QuickBooks to back up your reporting.
But what if QuickBooks does not match up with what you reported? Most likely, someone has inadvertently altered the data for the tax year in question. This can be quite a problem if you are not experienced in tracking down the changes that were made and making the necessary changes to rectify the problem.
To avoid this situation, you will want to protect the previous years’ data by “closing” it out. This is accomplished in QuickBooks very simply by clicking on the Company tab in the toolbar and selecting “Set Closing Date.” You will then select the closing date (the last day of your reporting period), and enter a password to protect that data from being changed. If someone tries to alter the data in a closed period, QuickBooks will show a warning and ask for the password before changes can be saved. Even if the changes are legitimate and the person knows the password, it will still cause the person to consider the outcome of the changes they are making.
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