Year-end closure of accounts is part of a company’s closing operations, and is used to create a company’s financial statements. It is also known as “closing the books of accounts”.
Each year, finance professionals bury their heads in the books to prepare their end-of-year accounts, statements, and financial reporting.
Year-end closing
Year-end closing is the process of reviewing, reconciling, and verifying at the end of the year for ascertaining business holding financially and operatively by closing out business from the previous year, carry forward balances from the previous year, and open posting accounts for the upcoming year . This involves calculating the business expenses, income, revenue, assets, investments, equity, and more.
The fiscal year refers to a 12-month period that often follows the calendar year from January to December, but can also start from the day the business was registered. This means that unlike the calendar tax year, authorities can choose an annual year-end closing date that best fits their industry and business performance.
During year-end closing, accountants check carefully for difference between company spend and budgets, namely accounts payable and accounts receivable. If any corrections are found, they must reach out to the employees involved for missing information or documentation to resolve the problems and adjust the financial ledger accordingly.
Difficulties during year-end closing
Here are some of the common difficulties that accounting teams face throughout the fiscal year which make financial closing a challenge:
- Missing receipts and invoices
- Human error
- Manual data entry
- Inefficient communication.
Temporary and Permanent accounts closure
Temporary accounts are income statement accounts prepared to understand the accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the term of the company.
Permanent accounts are balance sheet accounts that records the business transaction which extends for more than an accounting period. For example, a vehicle account is a fixed asset account that is recorded on the balance. The vehicle will provide benefits for the company in future years, so it is considered a permanent account.
Year-end accounting checklist
There are seven basic accounting tasks before the year ends. Books of account should be organized and set up for a smooth transition into the new financial year.
1. Compile Financial Statements
Statements are financial tools for the business. Financial Statements show past and current finances figures to plan business operations based on it. There are three important financial statements you should create.
Balance Sheet
The balance sheet shows your annual assets, liabilities, and capital. A small business balance sheet is another way of looking at your finances. You can see how much capital you have and how much money you owe.
Profit and Loss Statement
The profit and loss statement summarizes revenue and expenses. List all the profit gained and lost during the year on your profit and loss statement for small business. The bottom line will show the difference between money gained and lost.
Cash Flow Statement
The cash flow statement shows how changes in income and expenses affect your cash on hand. Cash flow reporting doesn’t just measure money available. It also shows the timing in which money comes in and out of your business. You can see which months are high and low for cash on hand.
2. Collect past due invoices
You will need to Prepare a debtors list which consist of list of people or organisations that owe us money at the end of the accounting period, but have not yet paid us. Collection of due invoices for which payment is pending. You should avoid rolling late payments over into the new year.
What do you do if a customer won’t pay? You can:
Set up invoice payment terms (e.g., due dates)
- Missing receipts and invoices
- Document the payment process
- Contact customers with past due invoices
- Establish a payment plan with customers
Similarly, prepare a creditors lis which consist of list of people or organizations that we owe money to, at the end of the accounting period, but have not yet paid. These will be the invoices received but have not yet paid.
3. Gather outstanding invoices & receipts
You’ll need invoices and receipts copies to close the book of accounts. To speed up this process, consider an automation software that includes digital receipt capture so employees can upload their paper expense receipts instantly.
Disorganized receipts put your business at risk for incorrectly recorded books. Messy records heighten your chances of making errors on your business tax return. And, you might miss out on small business tax deductions. To deduct an expense, you need to show proof. If you lose the receipt, you don’t have evidence of the business purchase.
4. Account for inventory
You must get an accurate count of the materials and supplies you have on hand if your business has inventory. Otherwise, you could wind up with empty shelves or inventory shrinkage (e.g., expired goods). Compare inventory accounts with physical stock, and review prepaid spend.
If your business has inventory, complete an inventory check before year-end. Match your inventory totals to your balance sheet. Accounting for inventory at year-end can also help you know how much you spent on inventory during the year and its value.
5. Reconcile bank accounts and credit cards
A major aspect of your accounting year-end procedures checklist is reconciling your bank accounts and credit cards. That way, you verify that your accounting records match your bank accounts.
To reconcile your accounts, compare your bank and credit card statements to your accounting records. Your statements should match the balance listed in your books. If they don’t match, find out the error and you may need to adjust one of your records for the balances to be equal (e.g., interest amounts).
6. Close out accounts receivable and payable
Prior to year-end, review both your accounts receivable and accounts payable to ensure you settle all collections and debts.
Any receivables owed at the end of the year should be added as credits on the income statement, and debits on the balance sheet. Doing so will ensure you start the next fiscal year with the right financials.
Any unpaid debts should be listed as liabilities or accrual expenses on the balance sheet. Keeping track of all your company debts is crucial to managing your finances effectively.
7. Back up information
To ensure you securely save your accounting data for the new year, add backing up information to your year-end closing checklist. To ensure your data is safe, have a reliable backup system in place. If you use online accounting software, you can rest easy knowing that your information is secure in the cloud.
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