One of the most important tasks for finance teams is the year-end close. Its main goal is to wrap up the financial year on a high note, ensuring everything is accurate, compliant and ready for the year ahead. With the right approach, the process can also become more manageable for the coming fiscal years.
What Is Year-End Close?
Year-end close is the process of reviewing and reconciling your company’s financial records at the end of the fiscal year. It is also known as closing the books. This process includes:
- Checking accounts
- Identifying and resolving discrepancies in numbers
- Preparing financial statements
- Ensuring compliance with legal and regulatory requirements.
Why Is Year-End Closing Essential?
The goal of the year-end close is to document and account for every dollar you have spent. Completing the year-end close process can help you:
- Do accurate financial reporting
- Meet legal requirements for taxes, audits and reporting
- Accurately plan your budget for the next fiscal year
- Boost credibility with investors, partners and employees
- Increase company performance thanks to accurate year-end data.
Below, we have included a clear, 17-step checklist to make your year-end close smoother and more efficient.
Your Checklist for a Successful Year-End Close
Given how much documentation businesses accumulate over a year, some of it can get lost between the pages. To make sure that nothing is overlooked, follow our annual close checklist step by step:
1. Perform Bank Reconciliation
Pull the ending balance from your bank statements and reconcile it with what you have in your books. Match transactions in your accounting system to your bank statements to ensure that everything is correct. If there is a mismatch (e.g. a missing expense), fix it in your records. This ensures that all your cash movements are reconciled and no expenses are missed.
2. Reconcile Accounts Receivable (AR)
Start by reviewing issued invoices, purchase orders, and shipping orders. Then, break these down in the sub-ledger for detailed customer transactions. Next, reconcile these numbers with the sub-ledger and AR ageing report. Finally, compare the total AR balance in the general ledger with the records in the sub-ledger to make sure everything is accurate.
3. Reconcile Prepaid Expenses
Compare what has been used and what has not (e.g. insurance or rent). Adjust your books to reflect what remains as a prepaid asset versus what should be an expense. This will help you avoid overstating prepaid expenses or understating costs.
4. Reconcile Inventory
Reconcile inventory by comparing what you have in your warehouse and what you have in your books. Conduct a physical inventory count, compare it to your system, and adjust for missing, damaged, or obsolete items. This ensures your inventory value is accurate and ready for a final audit.
5. Review Your PP&E (Property, Plant and Equipment)
Review large purchases that need to be capitalised. You can do this by running depreciation for the year and reviewing for obsolete items that should be written off.
Check purchase invoices to see what qualifies as a capital asset (e.g. equipment over a set value). Then, use your depreciation schedule to calculate yearly depreciation and remove any assets you no longer use. This keeps fixed asset records accurate and accounts for wear and tear over time.
6. Go Over Accounts Payable (AP)
Ensure all vendor invoices are received and recorded. Reconcile the trial balance to the sub-ledger and review the AP ageing report. Cross-check invoices with payments made and list unpaid invoices. If an invoice is missing, contact the vendor and accrue it as needed. This will help you avoid liabilities or missed expenses.
7. Perform Credit Card Reconciliation
Reconcile your credit card statements with the balance in your books. Open your financial system and compare the credit card statements to those numbers to make sure all your transactions are accounted for.
8. Review Accrued Expenses
It can be easy to miss expenses you’ve incurred but haven’t yet paid to vendors. You can keep track of these expenses in a separate file, where you will reverse past accruals once a vendor invoice is received. This prevents underreporting liabilities or overstating prior accruals.
9. Calculate Deferred Revenue
Create a table showing the breakdown by customer for funds received but not yet earned. Then, match the deferred revenue to the services or goods that still need to be delivered.
10. Manage Long-Term Debt
Debt management is essential for accurate financial reporting and compliance management. Monitor all outstanding loans and reconcile them with lender statements. It’s also important to track and accrue any interest owed that you have yet to pay.
11. Download Revenue by Customer
Review revenue details and check for any necessary adjustments. Pay extra attention to contracts with unique terms, like milestone-based payments or special clauses.
These contracts are the most prone to mistakes, but you can eliminate financial close errors with regular reviews. Adjusting entries as needed keeps your revenue recognition aligned with accounting standards and provides a true picture of your financial performance.
12. Write Off Bad Debts
Review your accounts receivable (AR) aging report to identify overdue invoices that are unlikely to be collected. Once you have identified them, adjust your books by recording the debts as expenses and removing them from AR.
13. Calculate Your Tax Provision
Work with your tax team to estimate your taxes owed for the year. Do not forget to review and adjust deferred tax accounts as needed to reflect future obligations accurately.
Staying on top of tax provisions ensures your business meets regulatory requirements and that your financial statements show a true representation of your tax position.
14. Adjust Your Retained Earnings
At the end of the fiscal year, it’s time to close out your net income into retained earnings. This involves adjusting your equity accounts to reflect the year’s profit or loss. This is how you conclude the financial results for the year and prepare your equity section for the next one.
15. Prepare Financial Statements
Financial statements, such as balance sheets, income statements, and cash flow statements, are crucial for understanding your business’s health. Generate these reports using accounting software or financial tools, but ensure all accounts are reconciled first. Accurate financial statements provide stakeholders with a clear picture of your business’s performance, making it easier to plan for the future.
16. Prepare for Audit
Preparing for an audit can seem overwhelming, but it is something you have to do once. If you do it right, you will end up with a template that you can use for all upcoming years. To start, gather all necessary documents, such as:
- Reconciliations
- AR/AP reports
- Bank confirmations
- Inventory records
- Fixed asset schedules and any other documentation you may need.
Label everything clearly, organise all files in folders, and ensure they’re easily accessible. This will simplify future auditing, reduce miscommunication and help auditors complete their work efficiently.
17. Conduct an Actual vs Budget Analysis
Analysing how your actual financial results compare to your budget gives you a detailed look into your business performance. Use variance reports to see where you exceeded your spending and where it fell short of expectations. Then, identify the reasons for these variances, such as unexpected costs or savings, and document them to help you make a better financial plan for the new fiscal year.
Speed Up the Year-End Close Process With Automation
Year-end closing does not have to be a complicated process if you do it right. However, rules and regulations may vary based on where your business is located, which can impact how you handle year-end accounting.
Businesses in different countries or regions are subject to local tax laws, financial reporting standards and compliance requirements. So, your year-end close needs will change depending on where you conduct your business.
Thankfully, the Aico platform can help you align your processes with these regulations and maintain accurate financial records. With our automation capabilities, you can easily standardise financial processes like account reconciliation while reducing time and expenses.
Take a deeper look at how the Aico platform works and contact us for a close-up look at your automation needs.