Year-End Close

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What Is Year-End Close?

The year-end close of a fiscal year refers to finalizing a firm's financial data at the end of the financial year. This complex and lengthy process ensures the accurate reporting of a business's financial data to tax authorities, investors, and regulators. It requires coordination across all departments.

Year-End Close
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It involves various steps regarding the transfer of statement accounts' income to accounts on the balance sheet. It helps examine and update the accounting books of a company. It also aids in setting a budget based on real financial data by identifying accounting balances or shortfalls.

Key Takeaways

  • The year-end close finalizes a business's financial data, ensuring accurate reporting to regulators, investors, and tax authorities. This process requires a coordinated effort across all departments.
  • Its process involves adjusting statements for compliance, producing key financial reports, reconciling and reviewing data, and finalizing financial records.
  • Its checklist includes consolidating tax documents, calculating depreciation, reviewing assets, preparing financial statements, and setting next year’s goals. Additionally, it involves collecting data and preparing a schedule.
  • Best practices include using a detailed checklist, automating tasks, starting early, closely reviewing financial statements, and executing effective month-end closes.

Year-End Close Explained

The year-end close can be defined as the process of preparing the general ledger accounts for financial statement reporting to start the upcoming accounting period. The entire process consists of reconciling and reviewing financial data, making necessary adjustments, and generating financial statements like cash flow, income balance sheet statements, and book closures.

For successful and effective close at the year-end:

  • All financial transactions of the existing year have to be recorded accurately,
  • There must be relationship awareness between ledger settlement and year-end close.
  • Dynamics GP year-end close checklist must be in place.

Only then can proper adherence to regulatory and accounting standards be expected. Various software solutions are available to reduce errors, streamline year-end close processes, and minimize the time required to complete them.

Process

Let us know the process of conducting the closing process at the year-end:

  • Reconciling and reviewing financial data to ascertain correct recording and representation in financial reports.
  • Making necessary modifications to financial statements like depreciation or accruals to make them adhere to accounting standards.
  • Accomplishing the financial statements related to the financial year and getting these ready for the coming fiscal.
  • Producing financial reports like income statements, cash flow statements, and balance sheets for the current fiscal.

Checklist

Every firm should have the following checklist to ensure accuracy during the closing at the year-end:

  • A financial closure schedule must be prepared.
  • Collect relevant financial data and documents.
  • Bank statements must be matched.
  • Review accounts receivable and payable.
  • Review the firm's assets.
  • Each asset's depreciation expense must be calculated.
  • Conduct valuation of inventory.
  • Income statement preparation.
  • Balance sheet preparation.
  • Consolidate mandatory tax documents in one place.
  • Review payroll register.
  • Check receipts and records of expenses pertaining to all employees.
  • Credit card and loan statements must be reconciled.
  • Agreements and contracts must be reviewed.
  • Examine the possibility of write-offs of bad debt.
  • Adjust and review accounts.
  • A cash flow statement must be prepared.
  • The year-end review must be done.
  • Next year's goal must be set.

Examples

Let us use a few examples to understand the topic.

Example #1 

Let us assume that a technology company called Techik, situated in the Silicon Valley of America, has to prepare for the annual close of its accounts. Its CFO, Jane, has been leading the accounting process currently. In the last fiscal, Techik achieved a revenue of $10 million and spent a whopping $7 million. Jane has reviewed the company’s accounts and found the following:

  • Payable related to Old York has its outstanding invoices finalized to the tune of $800000.
  • Receivable in California has an outstanding $2 million in outstanding in consumer payments.

Nevertheless, Jane sees a discrepancy in accounts data in the Chicago warehouse, requiring an urgent audit. Hence, the finance team, comprising analysts Mary Lin and John Mayer, rushed to the warehouse to check and modify journal entries to make them adhere to regulations and be accurate in terms of data. Their team has been trying to complete the close of accounts at year-end for the company, giving a clear financial representation of the firm to its stakeholders and the public.

Example #2

An online article published on 17 June 2024 discusses Goldman Sachs increasing its year-end goal concerning the S&P index from 5200 to 5600. It said that the markets had seen strong growth earnings from 5 mega-cap stocks in US tech along with a greater ratio of fair value price-to-earnings. Further, the stocks of Amazon, Microsoft, Google, Meta, and NVidia have risen by 45%, leading to their representation of 25% of the equity cap of the S&P 500.

Hence, Goldman Sachs's upward target revision shows a 3.1% increase from the previous close of 5431.60 of the indexes. Moreover, the brokerage anticipates that strong earnings growth and constant real yields will support a 15-time profit by earning ratio for the equal weight of the S&P 500. Furthermore, Evercore IS has also increased its year-end goal to 6000 in anticipation of AI-driven 8% earnings growth.

How To Speed Up?

To ensure a smoother and faster closing of the year-end process, one must follow the recommendations below:

  • Determine, communicate, and delegate specific close activities according to a strategic plan, including who will perform each task and when it will be completed.
  • Every aspect of the business and all departments must be involved to achieve the closing goals.
  • All team members must be provided with a checklist containing pre-, mid-, and post-closing activities for better coordination and faster close process.
  • Businesses should put in place the routine carriage of the reconciliation process and must undertake month-end and year-end close processes also. It will help accounts remain accurate throughout the year, allowing the accounts team to move to different close tasks to finish them early.
  • Teams must remain proactive regarding tax or accounting regulation changes before the year-end approaches to prevent any extra work and adherence-related activities.

Best Practices

Let us look at some of the best practices for year-end closing:

One must start early to gather and organize financial data much before the year ends.

  • Removing the physical processes with an automated software system of accounting to manage repetitive works like financial statements generation, regularly reviewing and organizing records.
  • Executing `the process of month-end closing effectively to address issues timely, leading to accurate accounting books around the year.
  • Formulate a benchmark checklist regarding year-end closing, streamlining the procedure and ensuring strict looking at all the critical steps.
  • Reviewing financial statements closely by contrasting existing year-end sum totals with the last year's. For this purpose, one may use the analysis of horizontal and vertical balance sheets to find any issues and examine them further.

Frequently Asked Questions (FAQs)

1

What are the year-end closing entries?

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2

What is the year-end closing inventory?

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3

What are the losses due to non-conductance of accounting at the year-end close?

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