Accounting Year End – Closing the Books

December 9, 2021

Accounting Year End – Closing the Books

Accounting is the process of identifying, recording, summarizing and analyzing an organizations financial transactions and reporting them in the financial statements and managerial reports. The financial statements and managerial reports summarize the organizations activities over a period of time. For the sake of this article we are referring to the year end period. Financial statements include the Balance Sheet (a snapshot of a business’s assets, liabilities, and equity), Profit and Loss Statement (summary of a business’s income and expenses), and the Cash Flow Statement (summary of a business’s cashi nflows and outflows). These financial statements are used by lenders, investors and creditors. A financial analysis of the managerial reports and key performance indicators of a business are used by managers within the organization to make informed decisions. There are two types of accounting methods. For this article we are referring to closing the books when using the accrual method, as it is the most common type of accounting. In the accrual method profits can be more accurately recorded and a business’s financial position can be tracked in more detail. For example, you track who you owe money to and who owes you. The accrual method of accounting is when revenue is reported as it is earned.  Unlike the cash based method of accounting in which revenue is reported when it is received. The following is a list of the process of closing the books at year end.

Bank Reconciliations

Bank reconciliations are commonly done monthly in order to match a business’s accounting records with the business bank accounts. The goal of the bank reconciliation is the catch any errors, fraud or possible compliance issues.

Account Reconciliations

The Unadjusted Trial Balance is a accounting report that shows the closing balances of all the general ledger accounts. It is used in the account reconciliation process at the end of an accounting period to bring a business’s books in line with the accrual method of accounting. The Unadjusted Trial Balance is also used to check that total debits = total credits and to check for errors.

Adjusting Entries

Adjusting entries include depreciation, amortization, prepaid expenses, accrued income and expenses, allowance for doubtful accounts, deferred revenue and unearned revenue accounts. Adjustments are made to these accounts at the end of an accounting period in order to ensure the data in your business’s financial records are inline with the accrual method of accounting and are compliant with corresponding accounting standards such as ASPE or IFRS.

Payroll Year End Reconciliations

Depending on the size of the business, number of employees, contractors, types of benefits utilized, employee expenses, WCB, etc. each business’s payroll reconciliation will vary in complexity. In order to ensure compliance in payroll practices it is important to reconcile payroll records. Here at Switzer & Co. we implement year end best practices based on The Canadian Payroll Associations year end checklists and recommendations.

Year End Financial Statements and Analysis

As listed above, the financial statements include Balance Sheet, Profit and Loss Statement and Cash Flow Statement. These statements summarize the business’s financial position over a period of time. They are used by lenders, investors, and creditors. The reliability of these reports depends on the accuracy of the yearly journal entries, adjusting entries and reconciliations listed previously. If a business’s journal entries, adjusting entries and reconciliations are done incorrectly this could result in late fees and penalties from incorrect remittances or lack of confidence from lenders or investors.

Financial Analysis and Future Budgets

Financial Analysis is an assessment security, liquidity and profitability of a business based on accounting reports using ratios and key performance indicators that are calculated based on a business’s financial statements. The financial analysis is used to identify positive and negative trends, provide the data needed to plan for future expansion and growth, and inform investors of possible investment opportunities.

In order to reduce the risk of potential errors, audit, and legislation issues it is highly recommended that that accounting and payroll records are kept accurately and compliant. Here at Switzer & Company we are here to do just that. We will take the stress away from your financials and provide consulting services to help you understand your number in order to help you grow.

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