It is this time of the year that different organisations and companies and moving up and down to close off the year. The struggle does not leave out the government agencies. Accountants must complete the day-to-day work on transactions, and perform other tasks to close the books. The accounting team works longer hours, and faces a number of additional deadlines.
As we close this 2021/22 financial year, we thought of guiding our readers on how to tackle it.
With proper planning and the right tools, however, the accounting department can complete the closing process in less time, and reduce the risk of errors. To create a smoother process, start with the end in mind.
Issuing Year-End Financial Statements
The primary goal is to issue the financial statements for the end of the fiscal year. To accomplish the goal, the accounting staff must complete a number of steps. As an example, assume that Rodney is the CFO of VINAStech, a company deals in buying, selling and repairing of Computer-related items. VINAStech must issue financials for the 30/06/22, which is the closing date.
Post all accounting transactions
Every transaction that occurred before year end must be posted, and that includes all necessary adjusting entries.
Most businesses comply with generally accepted accounting principles (GAAP), which requires businesses to use accrual-basis accounting for financial reporting purposes. This method posts revenue when earned, and expenses when incurred to generate revenue. The accrual method differs from the cash-basis accounting, a method that posts revenue and expenses based on cash inflows and outflows.
Here are three common accrual entries:
- Accounts payable: VINAStech purchases UGX 5 million of motherboards as material, and uses them wood in repair during June. The invoice has not been paid as of 30/06. The company increases a material expense account, and increases accounts payable.
- Accounts receivable: VINAStech sells and delivers computers and printers worth UGX 3 million to TRC & Co. on 12/06, and they have not paid VINAStech’s invoice as of 30/06. The firm increases sales (a revenue account) and increases accounts receivable.
- Prepaid insurance: On 1st June, the company pays UGX 2 million in insurance premiums for the next six months. The firm increases prepaid insurance, an asset account, by UGX 2 million and reduces cash UGX 2 million. On 30th June, VINAStech has one month of insurance expenditures. The company posts a UGX 1 million debit to insurance expenses and reduces prepaid insurance by UGX 1 million.
All three journal entries are posted to record either revenue or expenses in June, before the fiscal year-end closing. The remaining UGX 1 million balance in prepaid insurance is expensed in the next fiscal year. Accrual accounting entries are not recorded in the accounting records based on cash inflows or outflows.
Record adjusting entries
VINAStech also records adjusting entries before year end, and these are two common examples:
- Interest earned: The company earned UGX 1.5 million in interest on account balances for June, but the cash is not credited to the account until early July. On 30/06, VINAStech increases accounts receivable and increases interest income for the earnings.
- Payroll accrual: VINAStech owes UGX 5 million in payroll expense for the last week of June, and the next pay date is 5th July. The company records payroll expense and accrued payroll (a liability account) on 30/06.
Accounting departments typically maintain a closing checklist of required month-end and year-end closing entries in the accounting system.
Reconciling each account
The accounting staff uses a number of documents to reconcile each account, so that the account reports the correct year-end balance. Accountants need a complete set of receipts, vendor invoices, bank statements, and credit card statements to reconcile each account in the general ledger.
Cash is often the account with the most transactions, and reconciling cash is time consuming. Accountants must reconcile the cash balance per the books to the bank statement balance, and post any required adjusting entries.
Credit card statements are also used to reconcile the cash account, because cash payments are made to reduce the credit card balance. If any employees pay for a business procurement out of pocket, the business must pay reimbursements for the spending. Each credit card transaction must be assigned to the proper expense account.
Generating an adjusted trial balance
The trial balance lists each account and the current balance, and the financial statements are created using an adjusted trial balance. Businesses must post all transactions, reconcile accounts, and record adjusting entries to produce an adjusted trial balance. Here are the three most important financial statements:
- Balance sheet: Lists asset, liability, and equity balances as of a specific date. Balance sheet accounts are permanent accounts, meaning that the balances carry over from one year to the new fiscal year.
- Income statement: Reports revenue, expenses, and net income for a period of time (month or year). Income statement accounts are temporary accounts that are adjusted to zero when the books are closed each month and year. The impact of closing the accounts is a profit (or deficits) posted to net income, or as a net loss. The net income or net loss is recorded to equity in the balance sheet.
- Statement of cash flows: This statement groups cash inflows and outflows into three categories: cash flow from operations, investing, and financing activities.
There are other tasks that must be completed during the year-end close.
Other Year-End Closing Tasks
The year-end close requires the accounting department to complete all of the monthly close tasks, and to work on other tasks that are unique to year end. Here are some of those important tasks:
Documentation for an audit
The accounting staff must provide documentation and answer questions for an audit. Not all companies have an audit performed, but stakeholders (investors, creditors, regulators) may require an audit down the road.
When a CPA firm performs an audit, it provides a written opinion that states whether or not the financial statements are “free of material misstatements.” Put another way, the auditor did not find any errors that are large enough to change a financial statement user’s opinion on the statements. The dollar amount that is considered material is based on judgment.
Auditors typically complete their work in the two to three months after the fiscal year-end. The CPA firm needs access to receipts, invoices, the general ledger, and the other documents used to post accounting transactions.
Reports for the annual budget
Well-managed businesses operate based on an annual budget, and the accounting department provides reports to help managers create the budget. Variance analysis is a financial management tool used to increase profitability. Companies often include budgeted amounts in the accounting system, so that management can compare budgeted results to actual results during the current fiscal year.
While the budget process starts before year end, the annual budget may not be completed until early in the new year. This timing creates more work during the year-end close.
Getting through the year-end closing procedures can feel overwhelming, but you can take action to make the process less time consuming.
How to Make the Process Easier
These steps can help your staff save time, and reduce the risk of error during year-end processes. If you can complete more work in less time, you can issue the financial statements and complete other year-end tasks without incurring huge overtime costs.
Complete tasks before year end
Investigate unusual transactions and post adjustments before year end. If the accounting staff is proactive and doesn’t put off work until after 30/06, the year-end close will be easier. Small account balances with fewer transactions, such as petty cash, can be reconciled quickly. Gather and file all supporting documents as transactions are completed.
Use a closing schedule
Create a closing schedule that lists each task that must be completed, all required reports, and the deadlines for the year-end processes. The schedule ensures that all accounts are reconciled, and that each adjustment is posted. Explain the closing schedule to your staff, and ask for feedback on how the schedule can be improved. Are the deadlines realistic? Does your staff have the tools needed to make the deadlines? Find out.
Embracing automation is the most effective strategy to reduce the time required for the year-end close.
Use accounting automation
You may already use an ERP system or accounting software, but there are other tools that can automate manual processes.
VINAStech has a solution to all this. We help in setting up a computerised accounting system that simplifies all your work. Leave us a WhatsApp message on +256774675576. We shall respond.