Preparing your year-end financial statements should be easy if you've followed the bookkeeping know-how outlined in our other related articles. If not, don't worry; we'll walk you through the entire process in this article!
The end of the fiscal year is an important turning point in your company's accounting cycle. It is significant because it is the time of year when information must be gathered and reported in specific formats for tax purposes. It is also crucial because, after an entire year, we naturally want to take a moment to reflect on the period that just ended and make plans for the one ahead.
Year-end accounting is mainly completed in two steps:
- Give your accountant the relevant reports and transaction-level data that he or she will need to compute and submit your tax liability, along with any other required reporting.
- Bring your management accounting record-keeping 100% up to date. This is a fairly complex procedure, so we’ve broken it down into eight simple steps to follow below.
Step 1: Update Your Records
This should not be difficult because you have been using Wafeq to track your income and expenses all year. A final check will ensure that you have all the baseline data for your year-end and that you haven't missed anything.
Send out the remaining bills Get your invoices out for any completed sales or work you can date before the end of the year!
Keep track of side income A little bank interest? Fees for affiliate referrals? A lost royalty check? Record any money you've missed as well.
Assemble the remaining receipts and bills and record them Check to see whether there are any outstanding bills or receipts that you need to enter right away.
Complete your final annual payroll Include any year-end bonuses you may want to provide to team members or yourself.
Put your business's bank account in the balance Now that everything has been documented, it's time to balance your bank accounts one last time for the year.
Step 2: Examine Business And Personal Transactions
There will be a lot of instances where your business and personal finances cross even though you've ideally kept business transactions separate from your money in a dedicated business bank account. Make sure you have adequately recorded and documented all instances where you have paid business expenses or the business has purchased products for your advantage.
Step 3: Adjust Loan Balances And Interest Expenses
If your company has a bank loan or another type of commercial debt, your lender will have divided each payment you have made into two parts: Interest and principal reduction. In one of three ways, business owners often track monthly loan payments. Here are some of them, along with adjustments for each:
- The Loan liability account has been decreased as all payments have been recorded as Principal.
- The Loan debt has not changed because all payments have been reported as Interest.
- The expected amounts for Interest and Principal payments have been divided among each installment.
Step 4: Identify Unbilled Income
Realize that your monthly accounting may be distorted if you consider the income generated by a lengthy project to have been earned entirely when an invoice is issued. Instead, use the knowledge we demonstrated in another article about how to accrue a portion of the income each month, increasing the asset's value, called un-invoiced Income.
Step 5: Record Unearned Income And Client Payments
You might discover that you have income that is invoiced but not earned at year's end, just as you might have income that has been earned but not invoiced.
Even though your clients have paid your invoices, the goods and services listed on them could not be delivered until some point in the upcoming fiscal year. Therefore, these ought to be noted as prepayments by customers.
Step 6: Identify Unpaid Expenses
Had your company incurred costs as of the year's end for which you had not yet made payment or even received a bill? Maybe you had a little Christmas party for your clients, but the caterer hadn't yet sent you an invoice when the year ended on December 31.
Include a bill with a date when your company incurred the expense. Verify that the bill information is accurate when the "actual" Bill comes, but don't enter it again! Just pay it like you would any other bill.
Step 7: Record Prepaid Spending And Vendor Prepayments.
Similar to how you can have invoiced income you haven't earned by year's end, you might also have recorded expenses that your company hasn't yet used up. If you pay rent quarterly and your year-end falls one month into a rental quarter, you are allocating too much of the quarter's rent to the current financial year and should be applying the remaining two months to the following year.
Step 8: Examine And Adjust Your Inventory
Feel free to move on to the following section if your company is service-based without an inventory. You should have been keeping track of your company's Inventory in one of three ways if it accumulates:
- Perpetual method: Adding all purchases to your inventory asset and tracking inventory consumption in Cost Of Goods Sold (COGS) using journal transactions on a sale-by-sale basis
- Periodic method: updating Inventory and COGS, possibly monthly, depending on a physical count, and recording all purchases into a separate "Purchases" asset account.
- Direct to COGS: If your inventory levels don't change much, you might have decided to record all your purchases as COGS and stop keeping track of Inventory.
You now have a complete picture of the money received during your financial year and the expenses incurred to maintain that income after all adjustments have been made. Just as you have done every month, take a moment to analyze your year-end financial statements. If this isn't your first year in business, assess how your company performed last year and set objectives for this year. Additionally, this is a wonderful opportunity to export data for your accountant to complete your annual tax returns.
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