Question

What would happen if the books were never closed?

Answer 1

If book were never closed, following few things are possible:

1. You would never have a cut off to determine whether you have made a profit or loss

2. You would never know what is your financial position, whether your capital is increasing or decreasing

In case of listed companies, stakeholders will never be able to evaluate the performance of the company or assess the financial strength/weakness of the company

Apart from performance in terms of profit/loss, other operational parameters, like collections management, various ratios pertaining to profit and loss account, etc would not be possible to evaluate.

Due to these reasons, periodic closure of books of accounts is required. For internal reporting purpose, entities generally have monthly closure as it helps them to evaluate their performance on a month on month basis and take corrective action as and when required. In terms of statutory requirements, generally, stock exchanges require a closure on a quarterly or half yearly basis, of course, varying from geography to geography.

For any other points of discussion on this vast topic, please comment