Best Practices for an Effective Year-End Close
And, just like last year, the year-end close is approaching. Whatever mistakes we made last year, hopefully, we will not repeat them this year because we will be following the best year-end practices and using the most significant technologies to complete the year-end close. As we all know, during the year-end close, we review and update records, as well as prepare our books for the next fiscal year.
Accountants and bookkeepers manage plenty of tasks during the year-end close, particularly if accounting is done manually. Even with a manual system in place, you can perform year-end closing precisely and on schedule with careful planning and a standard checklist.
Procedures to follow during the year-end accounting
Though there are many tasks involved in the year-end close accounting, it is mainly centered around the 2 major tasks.
1. Preparing Adjusting Entries
In general, we begin "preparing adjusting entries" by running an income statement and balance sheet for the end of the fiscal year. For example, suppose you are billed quarterly for housekeeping services but have yet to receive the bill for the most recent quarter. In that case, you must accumulate the accounts payable expenditures for year-end by debiting operating expenses for the quarterly bill amount and crediting your accruals account.
Similarly, if you have received the goods but have not yet received the invoice, you should accumulate for these. You may also do the same with the services. You must accumulate income for services done but not yet invoiced, depending on your billing methods. Remember to calculate depreciation for any fixed assets at the end of the fiscal year and debit the depreciation expenditure account for the amount of depreciation while crediting cumulative depreciation.
2. Create closing entries
Once you are done preparing adjusting entries, you will need to work on the closing entries. In closing entries, we move balances from temporary accounts to permanent accounts. The purpose of preparing closing entries is to zero out the balance of the temporary accounts, ensuring that these balances are not carried to the following accounting period.
These are the temporary accounts that need to be adjusted.
- Revenue account
- Expense account
- Income summary account
- Dividend account
What are the challenges with the year-end close?
Unexpected issues during the year-end close are very common in accounting. Some of the most difficult issues with the year-end close arise during the review phase.
There can be delays in collecting the data from various sources, such as spreadsheets, sub-ledgers, and external systems.
Delay in making adjustments to journal entries and then reconciliations. This covers recording the transactions that were not recorded during the year, such as accruals and deferrals. Sometimes, you can face unexpected delays in compiling and formatting the financial statements. These may include a balance sheet, income statements, and cash flow statements.
Poor communication can have a severe impact on the entire year-end close process. Financial data that is not exchanged in a timely manner or that is shared but contains mismatched data can have a significant impact and delay on the year-end close process.
Lack of financial automation
Accountants may find the year-end close process tedious. There are numerous tasks to perform before the deadline. In such cases, you'll need a financial automation tool to help you automate accounting tasks and speed up the year-end close process. Many accounting firms rely on Xenett to review and close the books more quickly because it is an intelligent clean-up tool that can autodetect errors and ease the closing process.
Best practices for the year-end close
To minimize headaches during the year-end closing process, you must follow the best practices from the beginning of the year. Let's look at the finest practices for year-end closing.
1. Eliminate manual process
This may be the most effective way to streamline the year-end close process. Manual accounting takes a long time, and there is no guarantee of accuracy. Replace manual accounting with automated accounting. When you switch to automated accounting, you can save time and complete tasks ahead of deadlines. Additionally, incorporating automated technologies into your year-end close accounting chores can greatly improve the accuracy of the books.
2. Implement a better month-end close process
If your month-end close process is effective, you may encounter fewer stressful tasks during the year-end close. When we follow best practices during the month-end close, most issues are resolved on time. As a result, you won't have to be concerned about the accuracy of your books throughout the year.
Also read: Best Practices For The Month-End Close Process
3. Create a year-end closing checklist
A standardized checklist can assist you in streamlining the year-end closing process. The year-end close checklist keeps you on track and ensures that nothing critical is overlooked as you work. To make your year-end close go more smoothly, use our thoroughly written checklist.
4. Closely review financial statements
Once all adjustment entries have been completed, the CFO or finance team manager compares the current year-end totals to the previous year-end totals. Vertical and horizontal balance sheet analysis might assist you in identifying concerns for further examination.
5. Review financial results
Once the adjustment process is done, it is time to analyze your financial results using accounting ratios. Businesses can use these ratios to identify trends and make sound business decisions.
The bottom line
Follow these best practices to streamline your year-end close process and complete complicated accounting tasks promptly. There are many ways to improve the efficiency of your accounting procedures.
You can quickly accomplish your year-end closing tasks by utilizing modern accounting tools. Modern accounting software can save you time by eliminating manual work and automating numerous accounting tasks. Xenett is one such tool that accounting firms prefer as their first choice. To discover more about Xenett, schedule a demo call now.