How to Do a Small-Business Year-End Financial Close

The essential goal in closing the books is to do it right.

Introduction

A year-end financial close is one of the key records keeping services for a small business. A solid close delivers reliable financial statements, reveals accounting problems before tax returns are filed and gives owners a clean slate to start the new year. This guide decomposes the process into seizes, provides a last mile check list and explores many of potential pitfalls.

Establish deadlines and delegations of responsibility

It starts with scheduling a timeline for the close, including deadlines assigned to reconciliation, adjustment, review and sign-off tasks. Apportion tasks to certain people and bake in review periods. Two to six weeks is reasonable if the business is small, with all other considerations remaining equal.

Gather documentation and organize records

Gather bank statements, credit card statements, vendor invoices, receipts, payroll records, loan documents and all supporting documentation. Categorize these papers by account and month. With track-records of what is reciprocally exchanged, reconciliations are speeded-up and scramble to close accounts disappears at deadline time.

Reconcile cash and bank accounts

Start with bank reconciliations. Reconcile every transaction on the company’s books to the items on your bank statement with outstanding checks and deposits in transit, where applicable. Reconciled cash is the seed of credibility in financials!

Reconcile accounts receivable and payable

Double check that all customer invoices are being posted accurately and that collections are being applied against the proper accounts. For accounts payable, confirm that vendor invoices are recorded in the period they relate to, and payments are reconciled. Review aging reports for receivables and payables to identify sluggish collections or missing liabilities.

Review the inventory and cost of goods sold.

If you do carry inventory, count the stocktake and compare cycle counting figures to your ledger to reconcile inventory balances. Make manually adjustments to COGS and inventory valuation if required. The keeping of reliable inventory records will preclude the recording of material misstatements in profit and loss and balance sheet accounts.

Verify fixed assets and depreciation

Check your fixed asset register and post your additions, disposals and accumulated depreciation. Determine journal entries for depreciation through year-end. Well-kept fixed asset records are critical to accurate balance sheets and tax reporting.

Confirm payroll and employee-related liabilities

Reconcile payroll expense journals, tax revenue accounts, employer's withheld taxes for advertising and benifits. Make sure year end payroll adjustments (bonuses, accrued vacation) have been properly booked to the proper period. Confirm that employer tax filings and payroll records align.

Accruals and adjusting journal entries to record.

According to accrual accounting, expenses and revenue must be recorded in the period they are incurred, regardless of when money is exchanged. Record journal entries for both accrued expenses, prepaid expenses and deferred revenue among other period-end adjustments. Document in your adjusting entry the why and how it was calculated for reviewers and auditors to follow the numbers.

Prepare a trial balance after considering operating adjustments. : Look for suspicious balances, negative accounts or accounts with unexpected activity. Review and resolve such errors as duplicate entries, rejections or incorrect account classifications.

Prepare financial statements and compilations

Prepare interim financial statements—such as a balance sheet, an income statement, and a cash flow statement—using the adjusted trial balance. Perform a managerial review of the statements for reasonableness and consistency with business operations. Check the current year number against historical and budget to see if anything stands out.

Implement internal controls and documentation

At close, segregation of duties as much as possible, approvals needed for manual JE’s and add transparency around change (audit trail). Keep records related to reconciliations and adjustments. Great internal controls prevent errors from occurring and make future closes quicker.

Close, Approve and Finalize Books For the period for which books are to be closed

When the statements have been approved by management or the owner, close the books for the year. Close the accounting period so that none further changes can be made, and file away the year-end working papers and final report. Closing the books offers stability as a solid foundation for the new fiscal year.

Post-close tasks and tax preparation

Once the deal is sealed, create last minute reports for tax purposes, investment purposes and lender use. Consult your tax preparer or tax department by sharing completed financial statements and supporting schedules. Make necessary tax-related adjustments for filings.

Common mistakes to avoid

—Quick and dirty reconciliations: Not doing a bit of reconciliation work leads to ongoing errors.

—Missed accruals: Overlooking the need to accrue for expenses or revenue skews profit and loss.

—Poor documentation: No help in case of adjustments makes reviewing and auditing confusing.

—Overlooking Inventory and Fixed Assets – Frequently material misstatements if not vouched.

Actionable advice to speed up your future close

—Organize records by the month so year-end tasks are a matter of routine.

—Maintain a standardized chart of accounts to facilitate comparison over time.

—Record journal entries and keep templates of common recurring transactions.

—Train employees on close procedures and keep a written close checklist.

Conclusion

A disciplined year-end financial close makes what can be nerve-racking, mysterious work — and more so when you’re understaffed — into a calm, repeated exercise. Through developing a schedule, reconciling statements, recording adjustments as well as documenting decision making, small business can prepare financial reports with confidence and accuracy encouraging the discipline needed to start the new year on the right foot. Leverage the financial close checklist and best practices in this guide to avoid surprises and expedite next year’s close with a faster, cleaner process.