End of Financial Year Guide

Closing the accounting year and beginning a new one

The end of the fiscal year can be a busy time. Individual and small business owner need to know the most common activities that are done during the close of one business year and the beginning of a new one in order to make yearend tasks go as smoothly and efficiently as possible. 

The most common tasks to close business year include:

  • Reconciling Balance Sheet Accounts
  • Entering Year-end Accounting Adjustments
  • Closing the Books
  • Sending Customer Statements
  • Reporting for Year-End
  • Preparing 1099 & 1096 Forms
  • Consulting Your Accountant
  • Distributing Profits
  • Paying Sales Tax
  • Budgeting for Next Year

You may need your accountant's or bookkeeper's assistance to perform the activities if you think they put extra burden on your daily business routine.

Reconciling Balance Sheet Accounts

If you haven’t been reconciling your balance sheet accounts on a monthly basis, you’ll need to do so now or end of year balance sheet, profit & loss statement and other financial reports won’t be correct when preparing your year end income taxes as required by the IRS. 

Account reconciliation is the comparison of the account’s general ledger trial balance with external account statements, such as:

  • Bank statement
  • Credit card statement
  • Payroll register (if the payroll is managed by third party) 

Inventory and fixed assets can be reconciled against a physical count.

Entering Year-end Accounting Adjustments

Accounting adjustments are recorded to ensure that a true and fair view of the business’s financial performance and financial position is fully reflected in the accounts. Some of the main year-end adjustments are:

  • Accruals (accrued expense & accrued income)
  • Deferrals or prepayments (prepaid expense & prepaid income / unearned revenue)
  • Depreciation and amortization
  • Bad debts and provision for doubtful debts

Closing the Books

You need to “close” your income and expense accounts (closing the books) at the end of an accounting period. But if you use accounting software, most likely it doesn’t require you to close the books. On the first day of the next fiscal year, the bookkeeping software, such as QuickBooks, will automatically transfer net income into your Retained Earnings account and the income and expense accounts will be "zeroed out."

Sending Customer Statements

The end of the year is a good time to remind your customers of any outstanding balances that they owe you, or to send them a statement of their activity throughout the year.

Reporting for Year-End

The end of the year is a natural time to run reports and evaluate how your business has performed over the last year. Running reports is also an essential part of year end tax planning and tax return preparation. The two most important reports that you and your accountant will need are the yearend Profit & Loss and the end of year Balance Sheet reports.

Preparing 1099 & 1096 Forms

The IRS requires you to file a 1099-MISC form for each vendor to whom you make certain types of payments. This IRS form is called 1099 Miscellaneous Income because your vendor will need to claim these payments as income when filing income taxes to the IRS. You must mail these forms to vendors by January 31 for payments made in the previous tax year.

Form 1096 summarizes the information from the 1099 forms you are sending for the tax year. It is a form that you send only to the IRS. It must accompany the 1099-MISC forms that you submit to the IRS.

The IRS has introduced a new form 1099-K requiring all Payment Settlement Entities (Credit Card providers including banks, PayPal, and others) to report all qualifying payments made to individuals during the 2011 calendar year; this includes payments by credit cards, debit cards, and stored-value cards (including gift cards). To prevent duplicate reporting to the IRS, the 1099-MISC form from the small business owner must now exclude the payments types listed above; however, it must still include Cash, Check, EFT, ACH, and Direct Deposit payments.

Consulting Your Accountant

You should consult your accountant or CPA to determine if transactions have been accurately posted and to confirm the amounts used for filling out tax forms. You can give your accountant access to your company books so that he/she can either view or actually make adjustments to the books.

Distributing Profits

It’s not mandatory, but you can choose to distribute profits (retained earnings) to one owner’s equity account or to multiple partners at the end of the year.

Paying Sales Tax

You need to pay your sales tax at a minimum on an annual basis.

Budgeting for Next Year

The end of the year is a perfect time to think about budgeting for next year.