It’s beginning to look a lot like Christmas! Well not exactly now but, it’s almost December and you are already planning your family nights, writing your gratitude journals, thinking of shopping, and practicing your carols. Before the church bells start to jingle, there is something lurking in the shadows. Yes, this is how a scary story starts and this one can send shivers down your spine. It’s called: Year-End Accounting!
Cue the exorcism music!
It’s the end of the fiscal year and it’s a critical time for every financial team. Every year, the finance team buries their heads in the books to prepare their end-of-the-year accounts, statements, and financial reporting.
We don’t want you to be stressed because we care for you. So, to reduce the stress and improve your productivity during this period of time, we have set up a checklist that you can visit/ revisit when you sit down for your year-end accounting. Get them sorted before Santa Claus comes down the chimney.
Let’s Begin Shall We?
Did you know that the average accounting team spends around 25 days to complete a year-end accounting. My god! There is so much you can do in those 25 days. We can’t have you doing this for this long!
Let us first tell you what year-end close actually is
It is the process of reviewing, reconciling, and verifying that all financial transactions and aspects of the company ledgers from the past fiscal year add up and nothing goes missing. This usually involves business expenses, income, revenue, assets, equity, investments and much more.
During this period, accountants check really carefully for any discrepancies in how much the company spent and the budget they set, which is usually accounts payable and accounts receivable. If there are any discrepancy in the books then usually the financial team reaches out to the employees to make sure they showcase the documentation.
But Why 25 days? This sounds cut and dry right?
Wrong! Let us tell you why it’s really difficult and it’s necessary to have a checklist!
The difficulties:
- We are human beings after all and when we run a company, it’s easy to miss a few bills and documentation. It gets harder to juggle paperwork and coordinate with our fellow employees who are already piled up with a million things. Especially in a small business where people are wearing multiple hats, financial receipts can fall through the cracks if tabs are not kept on that!
- Speaking of human errors, this can seep into the data entry aspect as well. You miss one number or decimal and the entire bookkeeping falls down like a house of cards. When humans process complex documents in really large volumes, errors are bound to happen. It’s natural.
- Accountants usually need to communicate and get the data from all the stakeholders, employees, and managers. Usually, this is a tedious process and sometimes a certain team might be working in a silo which can create the whole “back and forth”. This can create friction in the data collection process.
- Speaking of friction in the process, when was the last time you saved up a receipt from the company lunch you had or the online receipt that you must have received from the employee who traveled for work? It’s really annoying to collect those receipts from everyone and even if you miss the $5 bill from Starbucks, it can create a hole in the book, figuratively.
We didn’t mean to scare you but since you asked, why does it take an average of 25 days, here is the reason. In some companies, it might take more than that as well!
Now that we have scared you enough (even though Halloween was last month), let us calm you down with a well-defined checklist so that you can start working on closing those books ASAP!
Bank and Credit Card Reconciliation:
Let’s start by making sure that your cash flow that is recorded is perfectly matching the external statements. A mismatch can create a huge tornado in your books and we really don’t want that to happen! So, let’s start with Bank reconciliation. Gather your most up-to-date bank statements, any canceled checks, and all the deposit slips. Then, let’s carefully compare them to every transaction on these statements with your internal accounting records. If there are any discrepancies, they will show up as outstanding checks or deposits in transit. They need to be identified and adjusted accordingly and once they are reconciled, start preparing the bank reconciliation statement and most importantly, document the process.
Why? Because the paper trail ensures accuracy and serves as a reference for future audits.
Now let’s turn heads towards credit card reconciliation. For this, collect all the current statements, receipts, and payment records. Once done, start verifying every charge against your company’s records to see if there are errors. After the reconciliation, start adjusting your accounting records and prepare a credit card reconciliation statement with your bank reconciliation document by your side, document the entire process meticulously.
Now on to the next one on our checklist, who do we have here?
Inventory, Fixed Assets and Depreciation
Let’s start with Inventory (If your small business has any inventory function. If your business doesn’t have inventory then please move on to Fixed Assets).
Where were we? Ah, Inventory!
Take that pen and paper and start conducting a physical inventory count to cross-check against recorded balances. Trust us when we say this, discrepancies will arise due to shrinkage, miscounting or any clerical errors. Put on your Sherlock Hat because investigation needs to be done and variance needs to be adjusted accordingly in the system. On the plus side, this can give you the opportunity to review your inventory valuation methods and it can help you maintain compliance. So, it’s a win-win situation all around.
We are putting the spotlight on Fixed Assets. You can start by reviewing your fixed asset register to confirm that it’s both accurate and complete. It’s important to conduct physical inspections which will verify the existence and the present condition of the assets. Let’s say you have added, disposed of or even transferred any assets during this year, make sure to add those as well. Start calculating the depreciation expenses and update the schedules all while assessing whether any assets might have impairment indicators.
Like we always say “KEEP DOCUMENTING”
Payroll and benefits:
The discrepancy in Payroll is a huge no-no (Every other discrepancy is a no-no as well but this has more importance). To make sure there aren’t any discrepancies, double-check employee classifications, tax withholdings, and benefits deductions. Check and see if they align with the reports and filings. Start reconciling your payroll bank statements with disbursement records and correct any discrepancies. Remember, when it comes to benefits, always ensure that deductions, contributions, and plan details are accurately updated, particularly for enrolments and terminations throughout the year.
Account Receivable Reconciliation:
It’s the amount your customers owe you after purchasing your product or your services on credits. Usually, it’s the list of invoices and clients that still owe you money for the services or subscriptions that’s already completed and delivered. These lists are sometimes long and sometimes really short (Lucky you!). With the list in hand, start calculating your AR turnover ratio. It will tell you how efficiently your business is collecting revenue. The higher the ratio, the smaller the list, which means your clients are paying their debts quickly. The lower the ratio, the higher the list, which means, you need to start working on your collection process. Regardless, start collecting those unpaid invoices before the end of the year.
Financial Statements:
These statements define how your business is running as they are the narrative that stands tall in front of the stakeholders. Understanding their importance, it’s really important to finalize and review your balance sheet to assess your financial position. This will make sure that all the assets and liabilities are accurately recorded. Start digging deeper into the income statement to evaluate your profitability, pinpoint revenue growth, and have a clear picture of cost savings opportunities.
Now let’s not just stop there. Start analyzing key financial ratios which can include debt to equity, current ratio, and profit margins. This will help you uncover even deeper insights into the company’s operational efficiency and financial health. Start documenting all the adjustments or reclassify with detailed notes for more clarity. Trust us, this will give transparency between you, the investors, and the stakeholders.
Tax Documentation:
We know that the last thing you want to think about is Tax Documentation but it’s important. So pay attention. Start by collecting all the necessary documents which include income statements, receipts, invoices, and expense reports, to make sure nothing is missed. Review these documents with huge magnifying glasses if needed because you need to identify eligible deductions, and credits and reduce your tax liability. If needed and if any discrepancies are found, make sure to reconcile them in your tax records to avoid any potential audits that might knock on your door! This can be easily sorted by leveraging opportunities to engage with tax professionals, and tax solutions or utilizing software to make the process more clean and unravel any overlooked advantages.
Internal Controls:
These controls usually safeguard the business against risks and always enhance operational integrity. This can only be done by conducting a thorough evaluation of your current controls and reviewing the key areas like cash handling, financial reporting, and procurement processes. This will help you identify any gaps or inefficiencies such as a lack of segregation of duties or outdated policies and you can address them with updated measures.
In such cases, it’s the ideal time to reinforce fraud prevention strategies by introducing dual approvals for high-value transactions, monitoring system access logs, and ensuring regular audits are conducted. This will make your internal control stronger than Fort Knox. Lastly, perform a comprehensive risk assessment and be aware of emerging threats like cybersecurity, vulnerabilities, and evolving regulatory requirements.
Now, with our above mentioned checklist, you are off to a great start. At the end of the day, the secret to a smoother financial close is to be well prepared, well organized, and proactive with accounting practice throughout the year. It also helps to have really good accounting software as well. But, If you work with a trusted accountant, make an appointment with them as early as possible. And as always, the more you can plan for these tasks throughout the year, the easier your year-end will be and it will be helpful to plan the gifts you are going to give to your kids in the name of Santa Claus. This really doesn’t have to be a dreadful process, but rather a smooth transition to next year’s challenges and victories, financially.
So, close those books early, be with your family, and have an eggnog on our behalf!
