It's not always to easy to have to close a business after pouring heart, sole and sweat equity into it. Regardless of whether you simply lost interest, are retiring or the venture just didn't pan out – many small businesses don't survive – there are some necessary accounting steps to take to wrap it up. The bigger the organization's size, the greater the number and size of the entries.
Take Inventory and Sell Assets
Basically, the first step a company must make is to take inventory and sell all assets when closing its doors; but before doing that, try to collect all outstanding accounts receivable since they could be difficult to get later. When selling assets, businesses may not seek full value for non-cash assets such as buildings, land, equipment, vehicles. Getting the best price may result in simply obtaining enough cash to pay off all liabilities. The entries to remove assets from the books include debiting cash and crediting each asset account for the monies received. A debit or credit to loss or gain on asset sale is necessary to record the difference between cash received and asset value.
After selling off your assets, it's time to pay any outstanding debts or liabilities related to the business. Essentially, liabilities represent any money owed to outside parties, such as vendors and lenders, any taxes or fees owed to the government . If preferred, an accountant can pay these items off, as long as the company has available cash. The entry will debit the liability account and credit cash as the company pays off the liability. Creditors usually expect full payment from the business, unless the forced closing of a company comes from a bankruptcy or other significant issue.
Distribute Remaining Funds
A company with shareholders will pay investors last, if any funds remain. These individuals rarely receive any money when a company closes its doors. A distribution to repay shareholders will debit shareholders' equity and credit cash, and then shareholders return their shares. A smaller business with an owner draw account works similar to the shareholder entries. Any final cash results in a debit to owner draws and a credit to cash for the final balance. In a partnership, any remaining funds or assets are distributed based on each member's capital account, assuming there's a positive capital balance.
If a company is making its accounting entries after closing its physical location, no lagging expenses exist. In some cases, however, a company will need to retain enough cash to pay the final expenses associated with its physical location. This includes rent, utilities and security, among other basic costs. Accountants will debit the expense account and credit cash. Closing expenses to retained earnings will be the final entry for this set of transactions. After completely closing a business, the law requires that you keep all business records for up to seven years, depending on where you operated. Although closing a business may not be easy, think of it as a valuable learning curve to help you navigate life's next adventure.
Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.