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These accounting procedures are carried out by all the accountants in all the organisations (for profit or non-profit). However, I do not know of a single accounting text book that shows the best practices.

Let us start with some clarifications:

  1. Even though the term 'year-end' suggests that these procedures are carried out at the end of the financial year, the same process and philosophy can be applied to the month end accounting (also called monthly management accounts).
  2. There are no set procedures – each organisation has to work out what is best for them. This can be a problem in the sense that you may be missing a few steps or tasks.
  3. Most of the financial transactions originate in such a way that you have to take the notice and record them in your accounting records. For examples, payments made to outsiders, invoices for goods sold on credit, invoices for credit purchases and so on. If you do not record them, your accounting records will be incomplete – for example, your bank statement will show some transactions but that are not recorded in your accounting records. You will, therefore, have to record them. However, the year-end procedures are such that the initiative has to come from you as an accountant. Nobody forces you to carry them out but it would be good to carry them out.

What are the objectives?

  1. To make sure that the Financial Statements prepared after the year end procedures contain the information that is true and fair.
  2. To detect any errors and prevent fraud.
  3. To make sure that all the items of income and expenditure are recorded on accrual basis.
  4. To make sure that the ledger balances that are transferred from one financial year to another are accurate.

When should you carry them out?

As the name suggests, year-end accounting procedures are carried out after the financial year ends but before the Financial Statements are prepared. Month end procedures can be carried out each month in a slightly different way which is explained later on.

What are these procedures?

Ideally, these year-end procedures should include the following. However, they should be adapted to suit the needs of the organisation.

1.Physical reconciliations

These will include checking the cash/petty cash with the cash book, physical verification of the inventory (of raw material, components, finished goods, goods for resale etc.) with the records kept. Also a very important reconciliation would be that of Non-current Assets (also called Fixed Assets) with the records kept.

2.Other reconciliations

These will include bank reconciliations, reconciliation of suppliers' accounts with the statements sent by them and sending out statements of accounts to customers. Reconciling customers' and suppliers' accounts at least once a year is vital. All accounts with unusual or odd balances should be investigated. For example, any customer's account with a credit balance should be investigated (since they are expected to have a debit balance in your records).

3.Ledger scrutiny

Doing a thorough scrutiny of ledger accounts of the nominal ledger (or general ledger)
An experienced accountant will be able to scrutinise the ledger accounts and find unusual patterns or inconsistencies. For example, a rent account which is paid every month should have 12 transactions for an accounting year. Any other number will require further investigation and necessitate adjustment either for accrual or prepayment.

4.Year-end adjustment entries

These journal entries are passed to make the Financial Statements more meaningful, relevant and also to adhere to the accounting concepts of prudence and accrual. Normally, these adjustment entries will include the entries for:

  • closing inventory
  • depreciation
  • accruals
  • prepayments
  • amounts to be written off (e.g. Irrecoverable debt)
  • deferred revenue expenditure
  • capitalisation of expenditure to be allocated to the non-current assets
  • profit or loss on sale/disposal of non-current assets
  • creation of any allowances/reserves for provisions and other liabilities
  • provision for directors' remuneration especially if based on financial performance

5.Closure of Revenue Accounts

Once, the adjustment entries are passed, all revenue accounts are closed for the accounting year and the balances transferred to the Income Statement (Statement of Profit or Loss). Depending on the legal format of the organisation, net profit (or loss) arising from the Income Statement is then transferred to the Capital or Retained Earnings (for limited companies).

6.Closure of Non-Revenue Accounts

Non-revenue accounts are closed with their respective closing balances for the year and a Balance Sheet (Statement of Financial Position) is drawn.
One major difference between revenue and non-revenue accounts is that the revenue accounts are closed each year with their respective debit or credit balances absorbed by the Income Statement. On the other hand, the non-revenue accounts are closed with their closing balances which become their opening balances for the next financial year. All revenue accounts will be opened afresh (without any opening balance) for the next financial year.

Monthly management accounts

A set of similar procedures can be applied to prepare monthly management accounts. However, following alternative treatments can be applied:

  1. In formal monthly accounts, all month end adjustment entries will be passed, all revenue accounts will be closed and the balances transferred to the Income Statement.
  2. A more pragmatic solution would be to prepare monthly management accounts outside the formal financial accounting system by using 'extended trial balance' or similar approaches. Here, the month end trial balance is drawn and exported to the spreadsheet wherein a set of 'dummy' or informal monthly Profit & Loss Statement with the Balance Sheet is prepared.
  3. Some organisations pass the month end journal entries in a formal way and record them into the financial accounting system but then they reverse them at the beginning of the next month nullifying the effect.

Bharat Shah (B.Com; A.C.A.; M.B.A.) has over 15 years of industrial experience at senior level and teaches at Learning Academy. He has taught ACCA / AAT subjects at FE and private colleges. The views expressed herein are the personal views of the author and not necessarily of the organisation.

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