Year-End Accounting: 8 Easy Steps To Close The Accounting Books
Last Updated April 14, 2023
For someone, a year-end is about the holidays and to spend quality time with the family. But not for a small business. Before enjoying the year-end perks, you must wind up the necessary finances. The business owner is responsible for the year-end accounting processes. Closing the accounting books is the top priority before you can even start having a fun time.
The books contain all financial information like revenue, expense, and income. These factors play a critical role in creating the profit and loss statement for any business. To ensure you have got the right information a professional accountant can serve their purpose.
But first, let’s begin with the basic question every entrepreneur must think about.
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What is Meant by Year-End Accounting?
Several transactions occur throughout the year. All of these transactions must be updated in a timely manner. So, they are recorded in income statements, balance sheets, and so on. Year-end accounting means recording the financial information properly.
This process takes place to establish the balance, close it and record it in bookkeeping in Dec 2021, as per the standard practice.
This way you can take care of the annual reports and the financial statements. Bookkeeping eliminates any errors in the financial records that might be discovered.
Note: The year-end period may vary for some businesses instead of the usual January 1 – December 31.
When a Small Business can Perform Year-End Accounting?
Technically year-end means the end of the year (in the literal sense). However, it can be confusing whether a business should consider the actual year’s end or the company’s year-end.
Usually business chooses a 12-month period. Some follow the year-end from January 1 to December 31. But a fiscal year-end does not necessarily start with January 1. Maybe your business was established on February 1.
Every business is different. So you can choose the option that best aligns with your business operations.
There are three steps to close the accounting books:
- The input of financial data into the accounting or recording system occurs.
- Reconciling data is verifying the accuracy of data that has already been recorded into the system.
- In order to compile financial reports like the income statement and balance sheet, company accountants “close the books,” or approve and complete the data.
Financial transactions are entered into a record-keeping system by designated employees from various business divisions. Transaction records include sums shown as credits or debits, the date of the transaction, details about the transaction, and frequently a special reference number. For sales of goods or services, asset sales, special purchases, or depreciation, this information may be entered into a general diary or a specialized transaction log. All journal entries will be recorded in the primary accounting book, the general ledger, by the end of the accounting period, which is often monthly (GL).
The GL keeps track of all accounts, including liabilities, assets, equity, income, and costs, and offers a record of financial activities and data that have occurred during the course of the company’s existence. Data must be reconciled after being entered into the company’s accounting system.
In order to confirm that the amounts entered into the accounting system are accurate, transaction records are compared to bank statements and other records as part of the data reconciliation process. Reconciliation for banking transactions, financial transactions with clients and vendors, inter-corporate transactions, and commercial transactions are also included. There is a discrepancy when the information recorded in the GL differs from the supporting documentation.
To guarantee that the GL appropriately reflects the financial activity, an accountant must then perform an investigation to identify the issue and fix it.
Approval and Accounting Closure
The company’s primary accountant or controller will receive the data after it has been reconciled and given final approval. The controller then “locks the books,” preventing anyone else from accessing the financial information for the recently ended period. An accountant would often apply the adjustment to the current month in which the error was discovered if it is discovered months or years after it was initially made. It is a type of correction called true-up entry, also known as a catch-up entry.
History of Book Closing
The word “books” refers to a time when an account activity book was kept. Ledger paper, with columns for the transaction date, description, and dollar amount, was used to keep track of each account. The book of accounts was created by combining ledger paper. There are five different types of accounts in general:
- Assets (cash, accounts receivable, inventory, owned equipment, and real estate)
- Liabilities (accruals, accounts payable, notes payable)
- Owners’ contributions and retained earnings make up equity.
- Income (revenue or sales generated by the business)
- Expenses (amounts paid to run the business)
The five accounts may have been compiled into a single book, or each of these categories could have had its own ledger or journal. An accountant would add up all the activities at the conclusion of each month or financial period and frequently draw a line at the end to indicate that period was “closed.” No more entries could be made into the book for a period after it had ended. For upcoming transactions, the book would start a new period.
The term “closing the books” originated from this accounting procedure. The “bookkeeping department” was the name given to the accounting division because it managed actual financial records.
Accountants still refer to “books,” “ledgers,” and “journals” even though few businesses now utilize paper and books to record financial transactions because software is more simple and more effective.
Time to Close the Accounting Books in Easy Steps
Usually, an accountant fulfills the responsibility of closing the books. Hiring professional help at this stage is crucial as they make sure no piece of critical financial information is stranded. If you are a small business owner you can either go for accounting software or hire a part-time accountant.
Accounts Affected by Closing Entries
When you are bookkeeping for Dec 2021, three accounts will be influenced by it;
- Revenue accounts
- Expense accounts
- Dividend accounts
These accounts are temporary or nominal accounts (remember the zeroing out). At this point, the accounts aren’t erased but the balance is transferred to the retained earnings.
In either case, you’ll need to follow the steps mentioned down below to ensure all things are being covered in the accounting books.
Journal Entries vs General Ledger
Transactions all year round are recorded in Journal Entries. That’s where you need to begin collecting the information. These transactions are transferred to General Ledger and posted into an account like Accounts Receivable (A/R).
Post the account’s total derived from the cash payments, sales, and cash receipts journal. Cash payments are the “cash disbursement” that also includes electronic transfers. Small Business does not necessarily need to close the book at year’s end. They can even do so at the month’s end. You can make selective entries in bookkeeping.
Sum of the General Ledger Accounts
Keep the invoices up to date so that you don’t lose any transactions. All transactions are then entered into the general ledger account. In case your customers haven’t paid yet, follow up with them. If you are using the accounting software you will get the email invoice reminder.
Trial Balance (Preliminary)
A preliminary trial balance shows the initial financial sum (before any adjustment).
It is a report that includes two columns – credits and debits. The credit and debit sides should be equal at all costs (balanced). If they are not balanced you need to go through the statement again.
Adjust the Journal Entries
In case you missed out on a few transactions on particular dates, you need to adjust them too. These can be accumulation (accrual) related to real estate taxes or depreciation. Record them so that you can close the book.
The adjustments will be made in the general journal.
Adjusted Trial Balance
If one side of the entries is more surplus than the other, it’s time to adjust the entries. Once those entries are adjusted you can calculate the sums of the general ledger account.
Add the adjusted entries and then you will be able to generate a new trial balance sheet. It is important that both sides of the column are balanced. Even if they are not, re-adjust the entries.
During the making of the adjusted trial balance, if both sides still are not equal, revise the adjusted transactions.
Create Financial Statements
In the case your debit and credit side is the same in the trial balance, now you will move ahead with the balance sheet and income statement a.k.a “profit and loss statement”. By using accounting software you can generate the statement.
Also using the accounting software also allows you to overview the business’s financial position at the end of the accounting period. The statement can be made if you are closing the accounting books on either a monthly basis or a yearly basis.
Revenue and expense accounts are zeroed at the year’s end. These are closing entries. Because of the closing entries, the balance is then transferred from the temporary accounts to the permanent accounts.
Final Trial Balance
At the end of the process of bookkeeping in Dec 2021, now the only remaining report is to generate the final trial balance. It consists only of the balance sheet accounts. As described earlier, the trial balance must be balanced.
In The Year’s End Double Check Everything!
Closing the accounting books is the common and standard practice you need to follow as a responsible business owner. It’s also common to make errors in journal entries. So one must be alert to handle the payrolls and all financial responsibilities in a proper way.
To avoid any troubles, you can hire professional accountants or bookkeepers to help you maintain the financial statements. In case you have additional questions to ask, you can always consult My Count Solutions.