If you’re running a small business in California, bookkeeping might not be the most exciting part of your day — but it’s crucial. One of the most overlooked year-end tasks is closing expense accounts. Whether you’re handling your books yourself or using small business bookkeeping services in California, understanding how to close expense accounts can save you headaches (and potential tax issues) later.
Let’s break it down step-by-step, with real-world context and insights from working with local small business clients.
What Does It Mean to “Close” an Expense Account?
Expense accounts track the money your business spends throughout the year — think rent, utilities, marketing, and supplies. When the accounting year ends, these accounts need to be reset to zero so that the new year starts with a clean slate.
In accounting terms, you’re transferring the total expenses from your income statement to your retained earnings or income summary account. This allows you to calculate your business’s net income accurately.
Why Closing Expense Accounts Matters
If you’re not closing out your expense accounts correctly, you could be:
- Overstating your expenses
- Misreporting your profits
- Confusing your future financial reporting
- Risking an audit or tax penalty
Many small businesses we’ve worked with across California run into this when managing books themselves or using outdated spreadsheets. Whether you’re DIY-ing or using accounting services for small business in California, it’s important to get this step right.
Step-by-Step: How to Close Expense Accounts
Here’s a simplified approach that works for both manual books and most accounting software.
1. Verify Expense Totals
Start by reviewing your general ledger. Make sure each expense account reflects accurate totals for the fiscal year. Check for:
- Duplicates or entry errors
- Transactions that were misclassified
- Unusual spikes that may require adjustment
Pro tip: In QuickBooks or Xero, you can run a “Profit and Loss” report and drill down into each category.
2. Prepare a Closing Entry
Create a journal entry to zero out each expense account. Typically, this involves:
- Debiting the income summary account (or retained earnings)
- Crediting each individual expense account
Here’s an example:
| Account | Debit | Credit |
| Income Summary | $25,000 | |
| Rent Expense | $10,000 | |
| Utilities Expense | $3,000 | |
| Marketing Expense | $12,000 |
You’re transferring the $25,000 total to the income summary.
3. Double-Check Your Work
Make sure all balances are now at zero for your expense accounts. If something’s off, now’s the time to investigate before you lock the books.
4. Close the Books for the Year
Most accounting platforms will have a “close books” option. If you’re doing this manually, you’ll just ensure no further transactions are recorded for the closed period.
Common Mistakes to Avoid
Even experienced business owners can trip up. Here are a few pitfalls:
- Forgetting to close temporary accounts: Expense accounts are temporary; they shouldn’t carry balances into the new year.
- Incorrect journal entries: If your debits and credits don’t match, it throws off your financial statements.
- Not backing up data: Always save a backup before making year-end changes.
When to Use Professional Help
Handling year-end closing can be a major stressor — especially if you’re juggling operations, staff, and customers. That’s where small business bookkeeping services in California really shine.
Whether you’re in Los Angeles, San Diego, or up north in Sacramento, local professionals can:
- Spot and correct errors you might miss
- Ensure compliance with California-specific tax laws
- Save time so you can focus on running your business
Working with experts gives you peace of mind, and usually more accurate financials come tax time.
FAQs About Closing Expense Accounts
Can I close expense accounts monthly instead of yearly?
Yes, especially for internal tracking. However, they are typically closed annually for financial reporting and tax purposes.
Do I need special software to close expense accounts?
No, but software like QuickBooks, Xero, or FreshBooks can make it a lot easier. Even Excel can work if your records are clean.
What if I forget to close my expense accounts?
Your financials will show inflated expenses the following year, which can mess up budgeting, profit projections, and taxes.
Final Thoughts
Closing your expense accounts is one of those unglamorous but essential tasks that keep your business running smoothly. If you’re managing your own books, it pays to know the process. If you’re working with accounting services for small business in California, make sure they’re walking you through or handling this step each year.