These are recommended accounting procedures that all accounting departments must consider undertaking as their year-end accounting procedures. These are generally never taught in any accounting class.
What should end year accounting procedures achieve?
- To verify that the Financial Statements prepared after the year end procedures contain the information that is true and fair.
- End year accounting procedure help to detect errors in the books of accounting kept throughout the year.
- To make sure that all the items of income and expenditure are recorded on accrual basis.
- To make sure that the ledger balances that are transferred from one financial year to another are accurate.
When should you carry them out?
As the name suggests, year-end accounting procedures are carried out after the financial year ends but before the Financial Statements are prepared.
The End of year Accounting Procedures
Ideally, these year-end accounting procedures should include the following. They should however be adapted to suit the needs of the organization.
- Physical reconciliations
These will include checking the cash/petty cash with the cash book, physical verification of the inventory (of raw material, components, finished goods, goods for resale etc.) with the records kept. Also a very important accounting reconciliation would be that of Non-current Assets (also called Fixed Assets) with the records kept.
- Other accounting reconciliations
These will include bank reconciliations, reconciliation of suppliers’ accounts with the statements sent by them and sending out statements of accounts to customers. Reconciling customers’ and suppliers’ accounts at least once a year is vital. All accounts with unusual or odd balances should be investigated.
- Ledger scrutiny
Doing a thorough scrutiny of ledger accounts of the nominal ledger (or general ledger)
An experienced accountant will be able to scrutinize the ledger accounts and find unusual patterns or inconsistencies. For example, a rent account which is paid every month should have 12 transactions for an accounting year. Any other number will require further investigation and necessitate adjustment either for accrual or prepayment.
- Year-end adjustment of entries
These journal entries are passed to make the Financial Statements more meaningful, relevant and also to adhere to the accounting concepts of prudence and accrual. Normally, these adjustment entries will include the entries for:
- closing inventory
- amounts to be written off (e.g. Irrecoverable debt)
- deferred revenue expenditure
- capitalization of expenditure to be allocated to the non-current assets
- profit or loss on sale/disposal of non-current assets
- creation of any allowances/reserves for provisions and other liabilities
- provision for directors’ remuneration especially if based on financial performance
- Closure of Revenue Accounts
Once, the adjustment entries are passed, all revenue accounts are closed for the accounting year and the balances transferred to the Income Statement (Statement of Profit or Loss). Depending on the legal format of the organisation, net profit (or loss) arising from the Income Statement is then transferred to the Capital or Retained Earnings (for limited companies).
- Closure of Non-Revenue Accounts
Non-revenue accounts are closed with their respective closing balances for the year and a Balance Sheet (Statement of Financial Position) is drawn.
One major difference between revenue and non-revenue accounts is that the revenue accounts are closed each year with their respective debit or credit balances absorbed by the Income Statement. On the other hand, the non-revenue accounts are closed with their closing balances which become their opening balances for the next financial year. All revenue accounts will be opened afresh (without any opening balance) for the next financial year.
Adapted from http://www.learnac.co.uk/index.php/blog/30-year-end-accounting-procedures