Overview

The process of closing Accounting Periods and Fiscal Years is simple and straightforward. However, to truly understand the process, we must first review several xTuple ERP configuration options. To begin, we will look at General Ledger (G/L) Account Number settings and how they relate to Accounting Periods that are open and/or frozen. Next, we will run two scenarios based on different configurations of these settings to further our understanding. Finally, we will examine important issues to consider before closing Accounting Periods and Fiscal Years.

G/L Account Number Settings

Two settings on each G/L Account Number definition are particularly important in relation to closing Accounting Periods. The Account Number screen is shown in the following screenshot:

G/L Account Definition

The two settings we will be focusing on here are "Allow Posting into Closed Periods" and "Automatically Forward Update Trial Balances." Let's review the impact of each setting.

Allow Posting into Closed Periods

• Keep the following points in mind when considering whether to select this option:If selected, transactions involving the Account will update the Account's Trial Balance even if they are distributed into closed Accounting Periods. Not selecting this option means users will be prevented from posting transactions into closed Accounting Periods when the Account is used. To correct a situation where transaction posting is being prevented for this reason, either open the Accounting Period in question or change the distribution date of the transaction. Keep in mind that the "Allow Posting into Closed Periods" option applies only to Trial Balances. Account activity is always recorded in the General Ledger (G/L) regardless of whether Accounting Periods are open or closed.

Automatically Forward Update Trial Balances

• Keep the following points in mind when considering whether to select this option:If selected, new G/L distributions will automatically forward-update Trial Balances for the Account whenever transaction activity is posted into an Accounting Period. Forward-updating carries the ending balance for an Accounting Period forward to the beginning balance of the next Accounting Period, continuing the process until the current Accounting Period is reached. Keep in mind that balances cannot be forward-updated into Periods that are in the future relative to the current Period. If not selected, Trial Balances for the Account will require forward-updating either manually, by closing the Accounting Period, or by using the forward update Accounts utility. We will learn more about forward-updating later in our example scenarios.

Accounting Period Status

Accounting Periods are assigned two independent statuses: "Closed" and "Frozen." Closed status means no further updates will be posted within that period, and the period is stable for reporting purposes. However, based on configuration of application the option to post while status is closed is available. Frozen status which follows closed, does not allow for further posting regardless of whether the application allows posting during closed. A sample list of Accounting Periods having various combinations of statuses is shown below:

Accounting Periods Statuses

Let's review the function of each status.

Closed

• Keep the following points in mind when considering the "Closed" status:
  • If your Accounts are set to not allow posting into closed Periods, then the system will prevent users from posting transactions into closed Periods.
  • Conversely, if you choose to select the "Allow Posting into Closed Periods" option for your Accounts, then users will be allowed to post into closed Periods—and the associated Trial Balance records will automatically be updated.
  • When you close an Accounting Period, xTuple ERP forward updates Trial Balances through to the current Period. Again, the system will automatically forward-update at the moment an Accounting Period is closed.

Frozen

• Keep the following points in mind when considering the "Frozen" status:
  • Trial Balances are not updated for Accounting Periods that are frozen. This restriction applies to all Accounts, even those Accounts that are configured to "Allow Posting into Closed Periods."
  • You may not freeze an Accounting Period unless it is already closed.
  • You must first thaw a frozen Accounting Period before xTuple ERP allows you to reopen it.

Scenario #1: "Safe Mode"

To further our understanding of how the Account Number settings impact the closing and reopening of Accounting Periods, we will look at two scenarios which take two slightly different approaches. The first scenario we will call "safe mode," while the second is called "convenience mode. We refer to the first scenario as "safe mode" because operating in this manner significantly reduces the chance of unintentionally posting into an Accounting Period.

In this "safe mode" example, we will be using a Cash Account called "Cash eBank" and a Supplies Account called "Office Supplies." The definition for the Cash Account is shown in the following screen:

G/L Chart of Accounts, Account Settings

The Cash Account is configured to not allow posting into closed Periods and also to not automatically forward-update Trial Balances. For the purposes of this exercise, the current Accounting Period is 2006-March. Let's look again at our master list of Accounting Periods and see how the current Period relates to those before and after it.

Master List of Accounting Periods

All the Periods prior to the current Period are both closed and frozen. By contrast, the current Period (2006-March) is open and not frozen.

Now let's look at our Fiscal Year information. The current Fiscal Year runs from January 1, 2006 through December 31, 2006. The current Fiscal Year is open. As we can see below, all the prior Fiscal Years are closed:

Master List of Fiscal Years

Process Flow Overview

In this scenario, we will see the processing for and implications of posting a transaction into a closed and frozen Accounting Period. Here are the steps we will be following:

1. Enter a simple Journal Entry using the Cash Account—and attempt to post it into a prior Period (2006-January) which is both closed and frozen.
2. See how we are prevented from posting into a closed Period.
3. Review the Trial Balance for any impact.
4. Open and thaw the Period (2006-January).
5. Observe how opening the closed Period affects both the Trial Balance and the G/L.

Posting into Closed and Frozen Periods

Perhaps the easiest way to demonstrate posting into a prior Period is to enter a simple Journal Entry using the "Simple Journal Entry" option found under the "General Ledger, Journal Entry" section of the Accounting Module. The Journal Entry screen is shown below:

Simple G/L Journal Entry

For this transaction, we will simulate a $500 purchase of office supplies, using both the Office Supplies and Cash Accounts. Notice how we have entered a distribution date of January 17, 2006--a date which falls within a closed and frozen Period.

Posting Prevented into Closed Period

Because our Accounts are marked to prevent posting into closed Periods, we get the following error message when we try to post the simple Journal Entry:

Prevented from Posting

The system will prevent users from posting into closed Accounting Periods if the Accounts are specifically set up to disallow it. No G/L activity is recorded when transactions are blocked in this manner. The error message indicates the dates for the closed Period in question. To allow the transaction to proceed—if that is what you truly want—then it will be necessary to identify the Period and then open it to allow the transaction to go forward. We discuss thawing and opening Periods in the next section.

Thawing and Opening Accounting Periods

In order for our simple Journal Entry to be posted successfully to the G/L—and for the Trial Balance to recognize it—we must first thaw and open the Accounting Period (2006-January) into which we attempted to distribute the transaction.

First, we perform the following steps to thaw the frozen Accounting Period:

• Right-click on the 2006-January Period
• Select the "Thaw" option

Once the Period has been thawed, we are now ready to open it. To open the Accounting Period, we follow these steps:

• Double-click on the 2006-January Period to open it for editing
• Un-select the "Closed" option
• The Period is now open

The Accounting Period has now been updated, as we can see in the following screenshot of the Accounting Periods master list:

Thawed and Opened Accounting Period

We can see our actions have caused the "Closed" and "Frozen" columns to read "No" for the 2006-January Accounting Period. We are now able to post the simple Journal Entry again—and it will be distributed successfully to the G/L.

Pending Transactions

If for some reason you have pending transactions in your G/L, you will be shown the following message when attempting to open a closed Period in which these transactions exist:

Pending Transactions Warning Message

Your options here are to investigate the transactions and learn more about them—and then, if appropriate, open the Period in question to allow the transactions to update the Trial Balance records. A "pending" transaction is defined as any transaction which has posted to the G/L, but whose Trial Balance record has not yet been updated to reflect the transaction amount. These types of transactions are rare in xTuple ERP. The following conditions may lead to pending transactions:

• Legacy data posted in xTuple ERP prior to xTuple ERP version 2.0.2
• Changes to Account settings after transactions have been posted

Forward-Updating Required for Trial Balances

Looking at the Trial Balances display, we see that the ending balance for the 2006-January Period is displayed in yellow type. This color-coding indicates that forward-updating is required to update the balances for all succeeding Periods:

Forward Update Required in Trial Balance

Because our Cash Account is not set to "Automatically Forward Update Trial Balances," we must intentionally forward-update. This is part of what makes this first scenario the "safe mode" scenario: the fact that the forward update must be performed manually. We can accomplish the forward update in either of the following three ways:

• From the Trial Balances display, we can right-click on the Accounting Period and select the "Forward Update" option.
• We can use the "Forward Update Accounts" utility found in the "Utilities" section of the Accounting Module menu. This utility can be used to forward-update all Accounts, a selected Account, or a group of Accounts by Account Type.

• We can close the 2006-January Accounting Period, which will by default forward-update the ending balance.

For the purposes of this exercise, we will use the third method—that is, we will close the 2006-January Accounting Period. When the Period is closed, a forward update will automatically be performed.

Closing and Freezing Accounting Periods

To close the 2006-January Period, we return to the Accounting Periods master list, as shown below:

Accounting Period Closed

After highlighting the 2006-January Period, we right-click on it and select the "Close" option. We could have used the CLOSE button instead. The Period is now closed. Next, we freeze the Period by using the FREEZE button.

Now let's take a look at how closing this Accounting Period impacted the Trial Balances.

Viewing Updated Trial Balances

Returning to the Trial Balances display, we can see that the ending balance for all Periods up through the current Period have been updated:

Update Trial Balances

Notice how the ending balance for the 2006-January Period is no longer yellow. And to verify that forward updates have occurred, compare the ending balance amounts with those we saw earlier before we closed the Accounting Period. Again, forward-updating occurred automatically when the 2006-January Accounting Period was closed.

Scenario #2: "Convenience Mode"

Our first scenario was called the "safe mode" because of choices we made when configuring our G/L Account Numbers. As you recall, both our Cash and Office Supplies Accounts did not allow posting into closed Periods or automatic forwarding-updating.

We call the second scenario the "convenience mode" because it takes the opposite approach to configuring G/L Accounts. In the "convenience mode," the Account Numbers are configured with the following settings:

Allow Posting into Closed Periods

• : Yes (Allowed)

Automatically Forward Update Trial Balances

• : Yes (Allowed)

To understand the implications of using these alternate configurations, let's compare the results we would get to those we got when operating in the "safe mode" scenario:

• Simple Journal Entry: Distributions to a frozen and closed Accounting Period will still result in the transaction being marked as unposted in the General Ledger. Frozen Accounting Periods will never allow updates to the Trial Balance regardless of how Account Numbers are configured.
• Thaw Accounting Period: Once the Period is thawed, however, the Journal Entry transaction will immediately be marked as posted in the G/L—and the Trial Balance will be updated appropriately. Yes, the Period is still closed, but the Accounts are now configured to allow posting into closed Periods.
• Forward-Updating: In addition to having its ending balance updated for the Period, the Trial Balance will also be automatically forward-updated. Again, the Period is closed, but the Accounts are set to automatically forward-update.

In the end, the "convenience mode" simplifies processing, since many actions occur in the background. However, this streamlining also increases the risk that your users may inadvertently post and forward-update into prior, closed Accounting Periods.

Before deciding on a method to implement at your site, you should pilot combinations of these Account settings to determine which give you the level of control you require.

Fiscal Years

Fiscal Years are used primarily for calculating retained earnings. The area where Fiscal Years are defined and maintained can be found in the "Fiscal Calendar" section of the Accounting Module. The Fiscal Years master list is shown in the following screen:

Master List of Fiscal Years

When a Fiscal Year is closed, xTuple ERP totals all Revenue Account balances for the Accounting Periods that make up the Fiscal Year and subtracts from that Revenue total the total for all Expense Account balances for the same Period of time. The resulting Net Income for the Fiscal Year is posted to the Retained Earnings, Year End Account specified in the System Accounting Configuration Module. The Accounting configuration screen is shown below:

G/L Configuration of Year End Equity Account

Revenue and Expense Accounts

Throughout this chapter we have discussed forward-updating and seen examples of it at work. Where Revenue and Expense Accounts are concerned, forward-updating stops at the end of the last Accounting Period in the Fiscal Year. This ensures that the beginning balance for all Revenue and Expense Accounts is $0.00 for the first Accounting Period in each new Fiscal Year. Account Numbers are assigned an Account Type (e.g., "Revenue" or "Expense") when they are created.

The following screenshot of the Trial Balance screen illustrates how the beginning balance for one Revenue Account has been reset to $0.00 for the month of January 2006--which is the first Period in a new Fiscal Year:

Revenue and Expense Accounts After Fiscal Year Closing

You can see that the beginning balance for our Revenue Account is $0.00 for all Periods that start in January, that being the first Accounting Period in each Fiscal Year.

Year-End Closing Considerations

Here are some pointers you should consider before closing a Fiscal Year:

• Make sure there are no pending transactions which might require posting within the Fiscal Year.
• Use the "Posted" column in the G/L Transactions display to make sure there are no unposted G/L transactions falling within the Fiscal Year. If unposted G/L transactions are found, address the issue using techniques discussed earlier in this document.
• Verify that all Trial Balances have been forward-updated through the last Accounting Period in the Fiscal Year. Look for yellow ending balances in the Trial Balances display to identify those Accounts whose ending balances have not yet been forward-updated. If yellow ending balances are found, address the issue using techniques discussed earlier in this document.

• Close all Accounting Periods that make up the Fiscal Year.
• Also, optionally freeze all Accounting Periods in the Fiscal Year.

Reopening Fiscal Years

Fiscal Years may be reopened after they have been closed. For example, you may want to reopen a Fiscal Year to recognize new transactions which have been posted—inadvertently or not—into Periods within a closed Fiscal Year. Keep in mind that reopening and then re-closing a Fiscal Year may cause your retained earnings amount for the year to be updated to reflect the value of any newly-recognized transactions.

To reopen a Fiscal Year, simply right-click on the Fiscal Year from the master list and select the "Open" option.

Conclusion

The process for managing Accounting Periods and Fiscal Years in xTuple ERP is flexible and straightforward. It will yield the results you expect so long as you understand the implications of the settings on your G/L Accounts and take a disciplined approach to ensure there is no pending activity in an Accounting Period before you close it.

Finally, let's recap some of the important points to consider when closing Accounting Periods and Fiscal Years:

1. The settings on your G/L Accounts control when G/L distributions are posted and when forward-updating occurs.
2. Before closing an Accounting Period, make sure there are no pending transactions that will require G/L distributions into the Accounting Period you are closing. In particular, look for the following kinds of transactions which may not have been posted yet:
3. Invoices with an invoice date in the Accounting Period being closed have been posted
4. Unapplied credit memos (customer returns for credit) with a memo date in the Accounting Period being closed have been posted or the date changed
5. Cash Receipts with a distribution date in the Accounting Period being closed have been posted
6. Vouchers and Miscellaneous Vouchers with a distribution date in the Accounting Period being closed have been posted
7. Checks with check dates in the Accounting Period being closed have been posted
8. Bank Adjustments with a distribution date in the Accounting Period being closed have been posted

In short, make sure any pending transactions are posted and processed prior to closing a Period. And keep the following points in mind:

1. If you close an Accounting Period, you can reopen it at a later date.
2. When you close an Accounting Period, balances are automatically forward-updated.
3. Revenue and Expense Accounts are only forward-updated through the last Accounting Period of a Fiscal Year.
4. Closing a Fiscal Year, whether for the first time or after subsequently reopening it, results in the distribution of Net Income for the year into the Year End Equity Account defined in Accounting Module configuration.