Your year-end closing process is an opportunity to update your records, review your goals, and plan for the coming year. Yet, for many small business owners, the year-end close presents a significant challenge, especially when relying on a manual accounting system.
By accelerating your closing process, you can save valuable time and tap into data that can vastly improve your future business decisions. Here are some tips to streamline your year-end close.
What is a year-end close in accounting?
The year-end closing process (also known as "closing the books") is the process of finalizing your company's financial statements for the year. A year-end close involves reviewing, reconciling, and verifying your financial transactions from the past year and seeking to ensure accuracy and compliance with established accounting standards.
The fiscal year close commonly involves activities such as:
- Creating a closing schedule
- Gathering outstanding invoices and paperwork
- Examining your company's assets
- Reconciling financial transactions
- Closing accounts payable and accounts receivable
As a result, your company can provide accurate financial reporting and meet its legal obligations. And the closing process will also bring data to the surface that'll help you make better decisions year-round.
What does it mean to close at fiscal year-end?
The fiscal year, also known as the financial year, is a 12-month period that businesses use as their accounting period for tax and reporting purposes. The fiscal year-end close date doesn't necessarily align with the calendar year. Companies may, therefore, perform fiscal year-end closing on a date other than December 31. For example, the end of the fiscal year for the U.S. government falls on September 30.
What is the difference between month-end and year-end closing?
Monthly and yearly closing are both vital accounting processes, though they differ by scope and frequency. A month-end close aims to close the books to meet standard monthly deadlines and ensure accurate, timely reporting. The year-end closing process involves finalizing a company's financial statements for the entire fiscal year.
The year-end closing process, therefore, serves as the foundation for assessing a company's financial situation, including its short- and long-term goals. But month-end closing can still help track progress throughout the fiscal year.
Benefits of year-end closing
A year-end close is more than just an essential accounting practice. It also provides measurable benefits for your business.
Accurate financial reporting
The year-end close will ensure the accuracy of your financial statements and reports. That way, you can clearly understand your company's financial health and make the most well-informed business decisions.
Regulatory compliance
Your closing process will reveal your company's financial stability and adherence to legal and industry regulations. The documents you generate as part of the process form an audit trail to record your company's activities.
Make informed decisions
Data drives the best decisions. Access to up-to-date financial statements will help you make decisions about the company's future. Company stakeholders will also have access to financial records to analyze the company's growth potential and make decisions about their investments.
Insight into your operations
By analyzing your financial data, you'll better understand your business operations. You can pinpoint areas of inefficiency or find new ways to allocate resources to grow your business during the coming fiscal year.
Steps of the year-end closing process
While details may vary in different businesses, the typical year-end closing accounting process will include the following steps.
1. Create a closing schedule
The process begins by preparing a schedule to close fiscal year accounting records. Identify any applicable reporting and data processing deadlines as well as the final fiscal close date.
2. Gather outstanding invoices and receipts
Next, collect any outstanding invoices and receipts to reconcile and close year-end books. You may need to communicate your deadline to your accounting team and other employees so they can submit documents before your deadline.
3. Post all accounting transactions
Most businesses rely on generally accepted accounting principles (GAAP), which call for accrual-basis accounting. This accounting method posts revenue when received and expenses incurred to generate that revenue.
When looking at your business finances, you'll want to pay attention to the five major types of general ledger accounts, which include:
- Assets
- Liabilities
- Owner's equity
- Revenue
- Expenses
Some businesses may use the cash basis accounting method, which means posting cash inflows/outflows as they occur. This method is simpler but less accurate, which is why the best practice is to use the accrual method of posting transactions.
4. Reconcile transactions
Now, it's time to ensure recorded transactions match your accounting records. Every transaction must match evidence from your credit card statements, bank statements, invoices, and receipts.
This process is typically the most time-consuming, especially when reconciling your cash accounts. Credit card statements can be used to reconcile your cash account since you can use cash to pay your credit card balance.
You'll also assign different expenses to their corresponding expense account during this step. You'll need to reimburse your employees for any expense they made out of their own pocket.
5. Record adjusting entries
Most business owners will have to create adjusting entries before the year concludes. Common examples of year-end closing entries include:
- Interest earned but not received until the next fiscal year
- Payroll accrued that won't be paid until the next fiscal year
For example, you may have interest accumulating in a bank account, but you can't access this interest until January, which is after the close of your fiscal year. You'll need to record an adjusting entry to account for the interest you generate but haven't yet received.
6. Create an adjusted trial balance
Before you can prepare any financial statements, you'll need to calculate your adjusted trial balance. The process is simple: add up all of the credits from your accounts and then all the debits.
7. Prepare financial statements
Now you're ready to prepare your company's financial statements. The most important statements include your:
- Income statement
- Annual balance sheet
- Cash flow statement
Balance sheet accounts are permanent, meaning you'll transfer the balance to the balance sheet for the coming fiscal year. On the other hand, income statement accounts are temporary accounts that you'll adjust to zero each time the books are closed—each month as well as each year.
How long does a year-end closing take?
Year-end closing can vary depending on the nature of your accounting processes. The reconciliation process can be time-consuming if your business relies on manual accounting methods. But, automated tools and technology can accelerate the process considerably. According to CFO.com, the top companies can close their books in as few as 10 business days.
How to close accounts payable at the end of the year
When closing your books for the year, you'll want to pay particular attention to your accounts payable and accounts receivable, which are typical accrual entries in your financial accounts. Remember that these are separate categories, so don't expect them to match.
To close accounts payable, make sure to account for all recorded expenses.
For example, if you've spent $1,000 to purchase new inventory but have yet to pay the invoice, you'll record this as an increase in your expense account and will increase accounts payable.
The same applies to accounts receivable. If you have sold $1,500 to a client, but they have not paid the invoice, you'll accrue accounts receivable and increase your revenue account by the appropriate amount.
The year-end closing checklist
Many companies stay organized by creating a year-end close checklist. When you use it in conjunction with your closing schedule, you can streamline your end-of-year processes. But your year-end accounting checklist might also be divided based on tasks that should be completed before the close of the year, as well as tasks that'll become more urgent as the closing date approaches.
November checklist
In November (or two months before your closing date), you might focus on processes such as:
- Collecting balances for all past-due accounts
- Reminding vendors, suppliers, and customers of deadlines for invoices and payments
- Entering all approved invoices for payment in December
- Distributing closing tasks to staff members
By completing these preliminary tasks, you'll be better situated to complete your year-end close and meet your deadline.
December checklist
Once December arrives, you'll be ready to address your closing procedures more directly. Your checklist may include items such as:
- Creating a closing schedule/timeline
- Gathering existing documentation
- Ensuring you've invoiced all customers for purchases in December
- Reviewing outstanding accounts receivable and payable balances
- Reviewing bank and credit card statements through December
- Reviewing company assets
- Checking prepaid accounts for accuracy
- Posting any outstanding transactions
- Reviewing inventory
- Reconciling transactions, download our free bank reconciliation template
- Calculating adjusted trial balance
- Preparing financial statements, explore our free financial statement templates
- Preparing for a potential audit
Finance teams can distribute this checklist to their team members and even delegate specific tasks to make the entire process as smooth as possible.
How can I improve my year-end closing process?
Improving your year-end close can save you time, which may be particularly valuable for business owners already navigating the December sales season. And the more efficient your year-end close, the more you'll be able to rely on accurate data to make smarter business decisions in the coming accounting period. Here are some ways to streamline your year-end close.
Plan ahead
Plan for your year-end close before the end of the fiscal year. That way, when your deadline approaches, you'll already have a head-start on at least some of the closing procedures. Use the above checklists to accelerate your year-end closing activities.
Optimize quarterly and month-end closing processes
While the year-end close has a larger scope than your monthly closing procedures, your monthly/quarterly closing processes can impact your year-end activities. Ensuring accuracy on your monthly closing and reporting will give you greater confidence in your data at the year's close.
Establish clear deadlines
Don't just use the end of the fiscal year as your only deadline. Set deadlines for things like gathering invoices and receipts or producing financial statements. That way, you'll keep the process moving and avoid running up against last-minute time constraints.
Expect delays—and prepare for them
You'll likely encounter delays in your accounting process, especially if your fiscal year closes around the December holidays when team members are busy. Request outstanding reimbursement receipts well in advance, and try to assess your staffing in advance so you know who you can delegate to during the closing process.
Automate core accounting processes
As with any financial task, automation is key. Automating areas such as accounts payable or accounts receivable will make the closing process faster, and it can also boost accuracy by eliminating the possibility of data entry errors. Also, the right accounting software can encourage clients to pay invoices on time to avoid outstanding payments.
Identify areas for improvement
Take time to review your financial reporting data and the process itself. You'll likely identify areas where you can improve in the coming years. Making these improvements can make it easier to close your books the following year.
Big things for small teams
Automation can improve every aspect of your small business and allow you to accomplish big things, even with small teams. BILL offers accounts payable automation tools that make it easier to conduct secure transactions while maintaining your records for audits and regulatory compliance. View BILL's accounts payable platform today and discover how automated tools can help your business reach its fullest potential.