Start the New Year Stress-Free: Your End-of-Year Accounting Checklist

Closing the books at year-end is an essential accounting task every business must undertake. The purpose of closing the books is to prepare accurate financial statements that summarize the business's performance and financial position. Having reliable financial statements helps business owners to make informed decisions, manage cash flow, secure financing, and assess the overall health of the business.

Closing the books involves:

·         Gathering year-end financial documents

·         Reconciling accounts

·         Recording final revenue and expense transactions

·         Running a trial balance

·         Adjusting entries

·         Updating the general ledger

·         Preparing the final financial statements

·         Close Revenue and expense accounts

Preparation and organization are essential - waiting until the last minute can unnecessarily complicate matters. The accounting team should allow sufficient lead time to collect financial information, follow up on discrepancies, and record transactions properly. With the right systems and procedures in place, businesses can close their books efficiently and emerge with financial statements ready for review and analysis, and not to mention tax season!

While closing the books may seem like a daunting year-end chore, approaching it systematically step-by-step makes it manageable. Please feel free to call us with any questions (602) 821-7516.

Gather Financial Documents

The first step in closing the books at year-end is gathering all of the financial documents for the period. It includes locating any bank statements, credit card statements, receipts, invoices, bills, and other documentation showing financial transactions that occurred during the year.

Collect bank statements for all business accounts, including checking, savings, and investment or money market accounts. Check online banking portals and download the monthly statements. Gather any paper copies of bank statements as well, if applicable.

For credit cards used for business expenses, collect the monthly statements. Depending on the number of cards used, set up files or binders for storing these statements. Having them organized will help with the next steps of reconciling accounts and recording expenses.

Obtain all receipts and invoices for expenses paid in cash, by check, or by debit/credit card. These are needed to have accurate records of payments to deduct. Make copies or scans of receipts to have both a physical and digital record. Double-check that all expenses have corresponding documentation.

Also, gather any bills, invoices, or documentation showing amounts owed by customers for services or products provided by the business. These will come into play when recording revenue for the period.

Having all these financial documents collected and organized is crucial to ensure all transactions are accounted for properly when closing out the year. It lays the groundwork for the remaining steps in the year-end close process.

Reconcile Accounts

Reconciling accounts is a critical step in the year-end closing process. It involves reviewing all balance sheet accounts and ensuring the balances match the source documents.

The key accounts to reconcile include:

Bank Accounts

For each bank account, pull the final bank statement for the year. Compare the balance on the statement to that in your accounting records. If any outstanding checks or deposits are in transit, adjust the book balance accordingly until it matches the bank statement.

Investigate any discrepancies and determine if adjustments are needed. Common reconciling items include bank fees, automatic withdrawals, interest earned, or deposits recorded incorrectly.

Credit Cards

Obtain the credit card statements for all business cards. Match up charges and payments on the statement to the entries in your books. Make any necessary adjustments.

Calculate the balance due and ensure it aligns with the credit card company's records. Take into account any payments or charges made since the statement closing date.

Accounts Receivable

Generate an aged accounts receivable report. Verify that open invoices match outstanding balances owed by each customer.

Follow up on any past-due accounts, disputed charges, or discrepancies. Write off any uncollectible accounts.

Accounts Payable

Print an accounts payable aging report. Confirm the balances and due dates match vendor records.

Investigate any differences and determine if adjustments are needed for things like finance charges, payments sent but not applied, etc. Add new payables for recently received invoices.

By thoroughly reconciling each account, you can identify and resolve any discrepancies before closing out the year's books. It provides assurance that all transactions are properly recorded.

Record Revenue

All revenue earned from products or services delivered during the accounting period must be recorded. It includes cash sales, credit sales, membership fees, subscription fees, or any other income.

·         Review sales records and invoices to ensure all revenue is captured. For cash sales, refer to receipts or point-of-sale system reports. For credit sales, check both invoices and payments received.

·         For ongoing subscription services, prorate revenue for the portion of services delivered during the accounting period, even if cash is received in advance. Defer any unearned revenue to the next period.

·         Match shipping documents with invoices to verify products were delivered before closing the books. Only revenue for delivered goods should be recorded.

·         Tally all the above sources to calculate total revenue. Double-check your work to confirm no income is missing or counted twice.

·         Enter the final revenue amounts into the accounting system to update the revenue accounts. It may include separate accounts for different product lines, locations, business segments, etc.

Recording all earned revenue is a critical step before closing the books. Review related documentation thoroughly and validate amounts to ensure revenue is complete and accurate. It prevents understating income and provides a clear picture of business performance.

Record Expenses

At the end of the accounting period, recording all expenses incurred during that time frame is important. This includes operating expenses like rent, payroll, supplies, utilities, etc., and any other expenditures related to operating the business.

Make sure to gather all bills, invoices, receipts, and any other documentation showing expenses incurred. Review bank and credit card statements to ensure no expenses were missed. For any pending bills or expenses without documentation yet, make an accrual-based estimate of the amount owed.

Go through each expense line by line and enter it into your accounting system. Record the date, vendor, amount, account, and other details—track expenses to the proper accounts, such as rent expense, utilities expense, wages expense, etc. Enter expense accruals or estimates for expenses incurred but not yet billed if needed.

Double-check that all expenses for the period are recorded, as any missing expenses will make the financial statements inaccurate. The income statement should show all costs of doing business during that time frame.

Recording period expenses accurately is a crucial step for closing the books. It provides an accurate picture of profitability for the period. It ensures all costs are matched to the revenue earned in that timeframe. Taking the time to record and classify all expenses carefully prepares the books for financial statement preparation.

Run Trial Balance

A trial balance is an important step in the accounting cycle that helps identify any discrepancies or errors before you finalize your books. Generating a trial balance means totaling all debit and credit account balances to ensure they equal each other. If they don't match, it signals an error somewhere that needs to be located and fixed.

To generate a trial balance, first, total all the debit balances and credit balances in each account. These two totals should match exactly. If they don't, scan your ledger and look for accounts with a balance on the wrong side. For example, if your Cash account shows a credit balance, that needs to be corrected to show a debit balance.

It's also important to check that you have equal debits and credits for each transaction recorded in your books. If a transaction is recorded with unequal debits and credits, it will throw off your trial balance. Review transactions to ensure accuracy.

Generating a trial balance is critical because it validates that your books are mathematically correct before moving on to adjusting entries and financial statements. It acts as a checkpoint, catching mistakes before they compound and creating bigger issues. Taking the time to run a trial balance can prevent headaches and rework down the line.

Make Adjusting Entries

One of the most critical steps when closing the books is to make adjusting entries. Adjusting entries update the books prior to issuing financial statements, converting the company's accounting records to the accrual basis of accounting. This is important because some events may not get recorded in time on a cash basis. There are a few main types of adjusting entries:

Accruals

Accruals record revenues earned or expenses incurred in one period but cash paid/received in another period. A common accrual is recognizing revenue that has been earned but has yet to be billed to customers. For example, a cloud software company would make an adjusting entry to accrue revenue for services delivered in December but billed in January.

Deferrals

Deferrals delay the recognition of revenue or expense that has been paid/received in advance. For example, a company may receive an annual software license payment in December that covers services for the following calendar year. The December payment would be deferred, and revenue would be recognized throughout the next year as earned.

Depreciation

Depreciation records the decline in value of fixed assets like buildings, equipment, and furnishings. Companies estimate how long assets will last and depreciate a portion of their value each year as an expense. Adjusting entries are needed to record the accumulated depreciation at year-end.

Making proper adjusting entries requires analyzing events yet to be recorded and determining the appropriate accruals, deferrals, and depreciation needed. These entries are crucial for converting books from a cash basis to accrual, matching revenues and expenses to the right period. Accurate financial statements depend on making all necessary adjusting journal entries.

Update Ledger

After preparing and adjusting the journal entries, the next step is to post those entries to update the general ledger accounts. This ensures the account balances are accurate and up-to-date before preparing the financial statements.

Post each adjusting journal entry to the applicable general ledger accounts, updating the balances. For example, if there is an adjusting entry to accrue interest expense, post that to the Interest Expense account in the general ledger, increasing the balance.

Review each general ledger account and verify that the balance reflects all transactions for the period, including adjusted balances from the adjusting entries. Accounts like Interest Receivable, Interest Revenue, Depreciation Expense, Unearned Revenue, and Prepaid Expenses should now have updated balances after posting adjusting entries.

The general ledger is now updated and complete with all transactions for the period. The account balances can now be used to prepare the financial statements. Updating the general ledger is a crucial step, as the financial statements will only be as accurate as the account balances in the ledger.

Take care to post all adjusting entries and double-check account balances carefully. An up-to-date general ledger matching the adjusting entries is vital for accurate financial reporting.

Prepare Financial Statements

At the end of the accounting period, it's essential to prepare the financial statements, including the income statement, balance sheet, and statement of cash flows. These statements provide a snapshot of the business's financial health and performance.

The income statement sums up all revenues earned and expenses incurred over the accounting period. This shows whether the business operated at a profit or loss for the time period. The income statement should list all income sources, cost of goods sold, operating expenses, depreciation, interest, taxes, and net profit or loss.

The balance sheet lists assets, liabilities, and equity as of the last day of the accounting period. This provides a view of what the company owns and owes at that point in time. The balance sheet equation should balance, with assets equaling liabilities plus equity.

Finally, the statement of cash flows tracks inflows and outflows of cash over the period. It breaks down cash from operations, investing, and financing. The statement reconciles the beginning and ending cash balances.

Preparing these key statements provides the essential information needed to assess the business's performance and financial standing at the end of the accounting period. Comparing statements over time can identify trends and highlight areas for improvement. Accurate financial statements are critical for both internal and external decision-making.

Close Revenue Accounts

At the end of the accounting period, typically the fiscal year, revenue and expense accounts need to be closed out, and their balances need to be zeroed out to start fresh for the new accounting period. This allows the business to track revenues and expenses accurately in the correct period.

To close revenue accounts:

·         Total all the revenue accounts and debit the balance—this zeros out all the revenue account balances.

·         Credit the total revenue balance to an Equity account, typically Retained Earnings.

Retained Earnings tracks the company's accumulated profits over time. Crediting total revenues to Retained Earnings updates the balance to include this year's revenues.

To close expense accounts:

·         Total all the expense accounts and credit the balance. This zeros out all the expense account balances.

·         Debit the total expense balance to Retained Earnings.

This reduces Retained Earnings by the total amount of expenses incurred during the period.

With revenues credited to Retained Earnings and Expenses debited, the net income or loss for the period is reflected in the updated Retained Earnings balance.

The revenue and expense accounts are now closed and zeroed out, ready for the new accounting period. This allows the business to accurately track revenues earned and expenses incurred in the proper period.

Should you have any questions, the West to East Business Solutions LLC team is happy to assist you with any level of accounting and financial planning. Please call for a free consultation today at (602) 821-7516 or email us at info@westtoeastllc.com.  Schedule an appointment with our CEO, Nadia Conn, or get expert advice from one of our controller or staff accounts who have the knowledge and experience to get your business off to a successful start.