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Chapter 5: Completing the Accounting Cycle

Chapter Introduction​

Marie has successfully completed her first month of proper accounting. She's recorded all transactions, made adjusting entries, and prepared financial statements. "Now what?" she asks Monsieur Schneider. "Do I start over for December, or is there something else I need to do?"

Monsieur Schneider explains that there's one more crucial step: closing the books. "We need to close temporary accounts—revenues and expenses—so they start fresh for the next period. This is called the closing process, and it completes the accounting cycle."

The closing process is the final step in the accounting cycle. It prepares the books for the next accounting period by:

  • Transferring revenue and expense balances to a temporary account
  • Transferring the net result (income or loss) to retained earnings
  • Resetting revenue and expense accounts to zero for the new period

In Luxembourg, the closing process is particularly important because:

  • It ensures accurate period reporting
  • It prepares accounts for the next period
  • It's required before filing annual accounts with RCS
  • It ensures compliance with PCN standards

This chapter completes your understanding of the accounting cycle. You'll learn how to prepare closing entries, create a post-closing trial balance, and understand how the accounting cycle flows from one period to the next. You'll also learn about liquidity measures like the current ratio and working capital, and understand Luxembourg-specific closing procedures and annual filing requirements.

By the end of this chapter, you'll be able to complete the entire accounting cycle—from transaction identification through closing entries—and understand how this process ensures accurate financial reporting for Luxembourg SMEs.

Why It Matters​

Completing the accounting cycle properly is essential for accurate financial reporting and business success. The closing process ensures that:

  • Period Reporting is Accurate: Each period's financial statements reflect only that period's activities
  • Accounts are Ready for Next Period: Revenue and expense accounts start at zero for the new period
  • Financial Statements are Complete: All temporary accounts are properly closed to permanent accounts
  • Compliance is Maintained: Luxembourg requirements for period-end closing are met
  • Business Decisions are Informed: Accurate period-end reports enable better decision-making

In Luxembourg, proper closing procedures are critical because:

  • Annual accounts filed with RCS must be properly closed
  • Tax reporting requires accurate period-end balances
  • PCN compliance requires proper account treatment
  • Audit readiness depends on complete closing procedures

Understanding the complete accounting cycle—from transaction to closing—gives you the foundation to maintain accurate books, prepare financial statements, and ensure compliance with Luxembourg regulations.

Learning Objectives​

By the end of this chapter, you should be able to:

  1. Describe and prepare closing entries for a business
  2. Prepare a post-closing trial balance
  3. Apply the results from the adjusted trial balance to compute current ratio and working capital balance, and explain how these measures represent liquidity
  4. Complete a comprehensive accounting cycle for a business
  5. Understand Luxembourg monthly/quarterly closing procedures
  6. Explain Luxembourg annual closing and RCS filing requirements