What does it mean to "close the books"?

To "close the books" refers specifically to the process of finalizing all accounting entries for a specified period, typically at the end of an accounting cycle. This involves ensuring that all transactions for that period have been recorded and that necessary adjustments have been made, such as accruals, deferrals, and any necessary corrections.

Once this process is complete, the financial statements, such as the income statement and balance sheet, can be generated accurately for that period, reflecting the true financial position and performance of the business. Closing the books ensures that the financial records are prepared for the next accounting cycle and that they comply with accounting principles and standards.

While preparing all financial transactions (the first option) is part of the process, it does not encompass the finalization or completion aspect that closing the books entails. Reviewing financial statements for accuracy is important but is typically a separate action that may occur before closing the books or in preparation for external audits. Updating accounting software refers to the technological aspect of managing financial data but is not directly related to the closing process itself.