Year-end accounting is a topic that is likely to cause a collective groan when you mention it around the office, but it needs to get done. Your best option is to ask a qualified business accountant to help you. This article explains how to close your business’s fiscal year and what you can do to prepare for it ahead of time. Some key takeaways:
- Accounts must be reviewed, reconciled, and finalized in a year-end accounting process before a fiscal year can be officially closed.
- Established companies often do month-end closings throughout the year to simplify the year-end closing.
- The documents you’ll need for an end-of-year closing include bank statements, payroll records, tax returns, and vendor invoices.
What Is a Year-End Accounting Close?
Businesses must reconcile their accounts at the end of the year before filing annual reports and tax returns. The IRS and state revenue departments require a clear start and end point to accurately determine tax liabilities. Shareholders and investors need the same clarity to assess capital gains or losses. The year-end accounting close makes this possible.
Accounts must be reviewed, reconciled, and finalized before a fiscal year can be officially closed. There will be accounts payable and receivable rollover, but most companies use accrual accounting that records revenue and expenses when they occur, not when the funds come in. It’s those accrual numbers you’ll need to do a close.
A year-end close verifies that all accounts accurately reflect the business’s financial transactions. That includes income, expenses, assets, liabilities, and shareholder equity statements. The year-end totals on these accounts must be correct to protect the firm against audits or erroneous tax filings. Errors can be costly.
Basic Preparation for Accounting Year-End Closing
Both sides of the general ledger must match for a closing to be effective. That means matching debits on one side to credits on the other. Established companies often do month-end closings throughout the year to simplify the year-end closing, but you may still need to go back and check those numbers before moving on.
Accrual accounting is mandatory for companies making over $26 million. Retail companies sometimes use first in / first out (FIFO) or last in first out (LIFO). Average cost and inventory cost are other variations. You are required to use the same method this year as you did last year to maintain consistency.
The documents you’ll need for an end-of-year closing include bank statements, payroll records, tax returns, and vendor invoices. Digitizing these documents during the year can simplify gathering them when needed. Implementing expense management and accounting software like QuickBooks can make the task even easier.
Why Is the Year-End Close Important?
Reconciling your books can reveal flaws in business processes and systems that you might not see in your normal day-to-day operations. Disorganization is one of them. Spending a few days trying to find receipts and check stubs can be enlightening. Revealing human errors in manual processes can be a catalyst for change.
Time is a precious commodity. Detecting and correcting flaws in your system can make you more efficient. Collaboration across departments to get account data can improve productivity. These are the underlying benefits of a year-end closing that add to the obvious advantages of having accurate numbers for reporting and tax filings.
Finalizing a year’s worth of transactions is a difficult undertaking. It requires meticulous attention to detail, so only your best people should work on it. Some common challenges include missing documentation, incomplete expense reports, and lost receipts. The people who do the year-end closing should have the knowledge and experience to solve these problems.
Financial Benefits of Year-End Accounting
There are several other financial benefits to a year-end accounting close. Foremost among them is keeping your company compliant with federal and state regulations. Ensuring you follow the Generally Accepted Accounting Principles (GAAP) standards is equally important, particularly if you run a public corporation.
Reconciling accounts is an opportunity to check the financial accuracy of your bookkeeping and verify that your financial reporting is accurate. Reconciliation can also uncover inefficiencies that can be corrected to improve cash flow and cut expenses. Your bottom line and shareholder profits are dependent upon that.
An accurate close gives your company a strong foundation for budgeting, forecasting, and long-term decision-making. Financial planning without it is pointless. Investors will lose confidence in your business if the numbers are wrong, and the IRS will likely step in with heavy fines and penalties. Small companies can’t absorb that kind of hit.
Preparing to Visit Your Accountant
Start your internal process by creating a schedule that everyone can follow. Year-end accounting involves several levels of work and may require the assistance of multiple departments. Create a calendar with deadlines to ensure everyone is on the same page. Include all the pre-work, such as organizing records and gathering documents.
The next step is to organize your paperwork. You’ll need financial records that include bank statements, balance sheets, income statements, cash flow statements, and expense reports. These are essential elements of year-end accounting because they show the transactions and reports executed throughout the year. You’ll also need receipts for your expenses.
Reconcile your accounts payable and receivable to the best of your ability before sitting down with your accountant. Check with clients and customers to see if any new payments are coming in before the last day of your fiscal year. Once the books are closed, everything outstanding will roll into the next year. We can discuss how to do that when you come in.
Conclusion
Your accountant can help you with other tasks in the year-end closing. That includes reconciling transactions, calculating depreciation, inventory assessment, financial statements, and secure storage of your records. At D&M Accounting, we also handle payroll and tax filings. Give us a call today at 262-253-9955 or go to our contact page to schedule an appointment.
