Year-End Accounting Checklist: How to Successfully Close the Financial Year

As the year ends, entrepreneurs, accountants, and financial teams meet the daunting task of closing the books. Whether you’re in a small company or a big corporation, closing your financial year successfully is essential to a seamless roll-over into the new year, as well as keeping you in compliance with laws and taxes. An effective year-end accounting process gives you an understanding of your company’s financial health and leads to informed decisions to plan.

1. Review Your Financial Statements

The first step in closing your financial year is to take a comprehensive look at your financial statements. This includes your balance sheet, income statement, and cash flow statement. These documents provide a snapshot of your business’s financial health at the close of the year and allow you to identify any discrepancies or errors before filing taxes.

• Balance Sheet: Ensure that assets, liabilities, and equity are properly recorded. Verify that all accounts balance.
• Income Statement: Review all revenue and expenses, making sure that everything is properly categorized, and that no income or expenditure is overlooked.
• Cash Flow Statement: Double-check your cash inflows and outflows, ensuring that your cash position is accurately reflected.

2. Reconcile Bank Accounts and Credit Card Statements

Bank account and credit card reconciliations are crucial to ensure that your business’s financial records match your actual bank and credit card statements. Discrepancies between your records and the statements can cause inaccurate financial reporting, which may lead to errors in your tax filings.

• Reconcile all accounts to ensure that the ending balances are correct.
• Identify and resolve any outstanding transactions.
• If you use accounting software, confirm that it is synced with your bank feeds to automatically import transactions.

3. Update Accounts Receivable and Accounts Payable

Review your accounts receivable (AR) and accounts payable (AP) balances to ensure they are accurate and up to date.

• Accounts Receivable: Check that outstanding invoices are correctly recorded and follow up with clients on any overdue payments. Write off any bad debts that are unlikely to be collected.
• Accounts Payable: Verify that all outstanding vendor invoices are included and ensure that any payments made after the close of the year are recorded in the appropriate period.

4. Ensure Payroll is Correct

Payroll is often one of the most significant expenses for businesses, so it’s important to ensure that all payroll records are accurate before closing out the year.

• Confirm that all employee wages, salaries, and bonuses are correctly recorded.
• Ensure that all tax deductions and contributions (e.g., payroll taxes, retirement plan contributions) are accurate.
• Review any year-end bonuses, commissions, or other special payments.
• Ensure compliance with any updated tax laws related to payroll, such as new Social Security contribution limits or other wage-related changes.

5. Record Depreciation and Amortization

For businesses with significant assets, it’s crucial to account for depreciation and amortization at the end of the year. Depreciation is the process of allocating the cost of a tangible asset over its useful life, while amortization applies to intangible assets.

• Review all fixed assets and calculate depreciation based on the appropriate method (e.g., straight-line or declining balance).
• Record any impairments or write-offs for assets that have lost value.
• Ensure that intangible assets, such as patents or trademarks, are properly amortized.

6. Review Inventory and Cost of Goods Sold

For businesses that carry inventory, a physical inventory count is essential at year-end. Accurate inventory values directly impact your Cost of Goods Sold (COGS), which in turn affects your bottom line.

• Conduct a physical count of inventory and compare it with the inventory records in your accounting system.
• Adjust any discrepancies in inventory quantities or values.
• Ensure that COGS is accurately recorded based on the inventory levels at year-end.

7. Make Necessary Year-End Adjustments

Adjustments are common at year-end to reflect accurate financial statements. These include accruals, deferrals, and other corrections that need to be recorded before closing the books.

• Accruals: Record expenses or revenues that have been incurred but not yet recorded, such as accrued expenses for utilities or unpaid invoices.
• Deferrals: Ensure that revenue or expenses that span multiple periods are properly deferred or recognized.
• Adjustments: Identify any mistake or corrections needed to reflect accurate financial performance.

8. Prepare for Tax Filing

Year-end is the time to ensure that you’re ready to file your taxes accurately and on time. Preparation for tax filing should start well in advance of the deadline, but it’s important to ensure that everything is in order before submitting your returns.

• Review your tax liabilities, and make sure you’ve set aside enough to cover any taxes due.
• Consider potential tax deductions and credits, such as business expenses, depreciation, and any available tax incentives.
• Gather all necessary documents, including receipts, invoices, and supporting paperwork for deductions.
• If you’re unsure about tax laws or changes that may affect your business, consult a tax professional to help with planning and filing.

9. Close Out Temporary Accounts

Once you’ve done your year-end adjustments, you must close out temporary accounts. Temporary accounts are accounts such as revenue, expense, gain, and loss accounts. These accounts are zeroed out at the end of the year so that they can reopen in the upcoming year, ready to start anew.

• Transfer any remaining balances in these accounts to the appropriate equity accounts (such as retained earnings).
• Verify that the closing process in your accounting system has been properly executed.

10. Prepare Financial Reports for Stakeholders

Once your financial statements are finalized and tax filings are prepared, it’s time to prepare any necessary reports for internal stakeholders (e.g., board members, investors, or managers) and external parties (e.g., lenders, auditors).

• Provide a clear and accurate overview of the financial position of the business.
• Share key performance indicators (KPIs), profit margins, and other metrics that demonstrate business performance over the past year.
• Include any recommendations for improvements or changes for the upcoming year.

11. Plan for the Next Year

After the financial year has been successfully closed, it’s time to shift your focus to the upcoming year. A successful year-end accounting process sets the stage for improved financial planning in the new year.

• Review your business goals and financial projections for the next year.
• Update your budget and financial forecasts based on the trends and insights from the past year.
• Consider making any necessary changes to your accounting processes, software, or financial management strategies to improve efficiency and accuracy moving forward.

12. Consult with Professionals if Needed

Finally, remember that year-end accounting can be complex, especially when navigating tax laws and ensuring compliance with financial regulations. If needed, seek advice from professionals such as accountants or tax advisors to ensure everything is handled correctly.

Conclusion

Successfully closing out your financial year requires careful attention to detail and a methodical approach. By following this year-end accounting checklist, you’ll ensure that your financial records are accurate, your tax obligations are met, and you’re set up for success in the year to come. A smooth year-end process can help you avoid costly mistakes, streamline your operations, and provide clarity for both business owners and stakeholders.