Year-End Reporting
11.1 Year-End Closing Procedures
11.2 Adjusting Entries
11.3 Preparing a Trial Balance
11.4 Generating Financial Statements
11.5 Opening New Books
11.6 Additional Reports
11.1 Year-End Closing Procedures
Steps and Timing
Reviewing and Reconciling Accounts
Summarizing to the General Ledger
This subchapter gives an overview of the process for closing your books at year-end. We discuss how to summarize financial activity for the fiscal year, as well as procedures you need to perform to help ensure that balances are recorded properly.
A fiscal year is an accounting period 1 year in length. It doesn’t necessarily coincide with the calendar year, although it is 12 months long.
Steps and Timing
All businesses must prepare year-end financial statements for tax preparation. Most of the work takes place in the month following your year-end month. For example, for a December year-end, you will likely complete the closing process in January.
Here are some of the main tasks involved in the year-end close:
• Closing payroll for the year and meeting governmental and reporting requirements by preparing required payroll tax returns.
• Closing out accounts and the general ledger and generating financial statements, including a statement of retained earnings and a statement of cash flows.
• Filing federal and state taxes and submitting tax payments to other agencies.
SEE ALSO 12.3, “Sales Taxes”
• Retiring old accounts.
• Preparing schedules and documentation for your outside accountant (or auditor if you work for a public company).
• Preparing closing entries, closing the general ledger, and opening new books for the next period.
Closing entries are entries to close out revenue and expense accounts for the year and transfer any profit or losses to the balance sheet.
If your company files monthly financial statements, some of these procedures are no doubt familiar to you. Indeed, you perform many of the same tasks any time you close an accounting period, whether it’s a month or a year. For the remainder of this chapter we’ll explore the ways the year-end process is different.
SEE ALSO Chapter 10, “Monthly Closing Procedures”
Reviewing and Reconciling Accounts
At the end of the year you need to review and reconcile certain accounts. These include …
• Cash. You must reconcile the bank account and cash on your books. Remember to keep copies of these reports for your records whether you have a manual or automated system.
SEE ALSO 3.4, “Preparing a Bank Reconciliation”
• Accounts Receivable. Even if you don’t prepare an aging schedule on a monthly basis, you need to do this at year-end to determine write-offs and/or what provision needs to be added to the allowance for doubtful accounts.
SEE ALSO 4.3, “Accounts Receivable”
• Accounts Payable. A review of outstanding bills at the end of the year is also recommended, for two reasons: making sure you’re keeping up with payments, and confirming that all expenses are recorded in the proper period.
SEE ALSO 6.4, “Cash Disbursements”
• Inventory. You need to take an annual physical inventory to determine the actual quantity of inventory on hand at the end of the year. Any differences will be adjusted with an adjusting entry.
SEE ALSO 5.2, “Determining Inventory Quantity”
SEE ALSO 10.5, “Adjusting Entries”
• Payroll. In addition to updating employee accounts and benefits and preparing an accrual for wages and taxes incurred but not paid, employers also must file tax payments and certain reports with the government at year-end by preparing required payroll tax returns.
SEE ALSO 10.3, “Closing Employee Accounts”
SEE ALSO 12.2, “Payroll Taxes”
• Fixed Assets. Review any sales or additions to plant property and equipment to confirm they were properly accounted for. This includes preparing a schedule of fixed assets, which you can do automatically with most computerized accounting systems.
SEE ALSO 11.6, “Additional Reports”
If your company closes its books monthly, you’ll find many year-end closing procedures are the same. Most of the major accounts—including cash, accounts receivable, inventory, and accounts payable—need to be reconciled. You’ll also prepare a trial balance, record adjusting entries, and produce financial statements, ultimately closing revenue and expense accounts and transferring net income or losses to retained earnings on your balance sheet.
But different responsibilities come with the end of your fiscal year, too, such as making tax payments and preparing schedules and financial reports needed to meet federal laws for public companies or to give your accountant at tax time.
Summarizing to the General Ledger
As with a monthly or other interim period closing, you need to summarize the data from your journals—cash and sales, purchases and disbursements, and general—for posting to the general ledger. In addition, you should tally the balances in each account of your general ledger and reconcile these with your subledgers before putting together the trial balance as shown in the following diagram. This is a good way to double-check that all cash transactions have been properly recorded. With a computerized system, all these balances will have been automatically updated, but you’ll still have to reconcile the accounts when you run your reports to be sure everything adds up and troubleshoot any errors.
SEE ALSO 15.1, “Benefits of Computerized Accounting”
This diagram illustrates the information flow into the general ledger and some of its checks and balances. Totals are posted from the cash disbursements and cash sales journals to the general ledger account. At the same time, subsidiary ledgers track balances of individual A/R and A/P accounts. These balances can be compared to totals in the general ledger.
At year-end, you also need to prepare closing entries to ready the books for the next period. Some larger companies do this monthly, but yearly is more practical for most small businesses.
This diagram shows the year-end closing cycle from initial recording of transactions in the journal (1) to posting to the general ledger (2) to the trial balance (3) to adjusting entries (4) which are put on the adjusted trial balance and then (5) posted on the general ledger. Then you put the balance sheet, income statement, and statement of cash flows (6) together with the closing entries, which ready the books for the next period (7) and are posted to the general ledger.
If you produce monthly financial statements: for asset and liability accounts, where the balance is updated monthly, the general ledger balances may be carried forward onto the trial balance and become the basis for the balance sheet.
For revenue and expense accounts, you can also carry the ledger balances forward onto the trial balance. If you want to produce an income statement for the year, adjusting these balances is sufficient. If you close your accounts monthly—which is more common for larger publicly owned companies—you’ll have to add the profit and loss (P&L) for December to the previous 11 months to arrive at income for the year. (A computerized system will do this for you.)
If you only produce annual financial statements: Both asset and liability accounts and profit and loss account information can be summarized for the year directly from the general ledger balances. Small businesses with manual accounting systems are more likely to close accounts annually.
Whether you close accounts monthly or once a year, the information must still be summarized from transactions to journals to ledgers to financial statements. In the upcoming subchapters we take you through the year-end closing procedures step by step.
Identifying Entries
Bad Debts
Inventory
As with other periods, when closing out the year, you need to be sure revenues and expenses are recorded in the proper period. In this subchapter, you learn how to determine the adjusting entries needed at year-end.
Identifying Entries
To identify necessary entries, you can start with the procedures we described in Chapter 10, including reviewing unpaid bills, prepayments, and depreciation schedules as well as looking back over adjusting entries you made in the past.
SEE ALSO 10.5, “Adjusting Entries”
In addition, you might find certain entries are more convenient to make only annually—adjustments to the bad debts allowance, for example, and to inventory after you’ve taken a physical count of what’s on hand. Some companies also only record depreciation once a year.
You usually make these adjustments after running the initial trial balance. At year-end, it’s sometimes helpful to make a spreadsheet showing the trial balance, adjustments, adjusted trial balance, and preliminary income statement and balance sheet all on the same page. This is known as a trial balance worksheet. This worksheet is useful because its format allows you to track changes in accounts. Columns for the trial balance, adjusted entries, the adjusted trial balance, balance sheet, income statement, and often the cash flow statement appear side by side, making the computations easy to follow. We’ve included a sample worksheet later in this chapter.
A trial balance worksheet is a schedule that allows you to take the trial balance through adjustments to the financial statements all on one page.
Some companies write off bad debts monthly. Others do it only once at the end of the year. Whichever way you choose, you’ll want to prepare an accounts receivable aging schedule.
SEE ALSO 4.3, “Accounts Receivable”
For example, Go Places Camping Gear, Inc., has the following accounts receivable at 12/31:
GO PLACES CAMPING GEAR, INC.
ACCOUNTS RECEIVABLE AGING SCHEDULE
DECEMBER 31
Go Places management has recently had discussions with P. James regarding his account and received assurances it will be paid next month. Go Places won’t directly write it off, but it will need to recognize bad debts expense for the year, as is its policy. It does this using the following calculation, with percentages based on past history of collectability:
Many small businesses find it more efficient to simply write off individual accounts, or portions of them, when they go over 90 days. If Go Places used the direct write-off method and believes the P. James $1,000 account balance to be uncollectible, they would directly write off $1,000 to bad debts expense instead of using the allowance.
Larger companies tend to use an allowance for doubtful accounts, which is a reserve or contra account to accounts receivable. However, Go Places writes off bad debt amounts directly against accounts receivable and bad debts expense:
If Go Places was to receive payment for a debt previously written off in another period, it would simply reverse the entry to bad debts expense or the allowance account and debit cash.
Inventory
Companies are required to take a physical count of their inventory at least once a year to verify the actual quantities in stock. Breakage, theft, and misclassification or other recording errors may result in on-hand inventory differing significantly from what’s recorded on the books.
Go Camping closes its books in January and takes a physical inventory at the same time. Its physical count differed from the books by 100 units (cost each: $12), which were damaged in storage and unsellable. Go Camping made the following entry to adjust its books at year-end:
Companies with high-value inventory often keep a separate reserve for shrinkage and breakage. In that case, instead of recording any difference to cost of goods sold, it would be written off against the reserve account.
You should record adjusting entries in the general journal and post them to the general ledger from there. After you have posted all the adjusting entries, you’re ready to prepare your trial balance.
11.3 Preparing a Trial Balance
Using a Trial Balance Worksheet
A Sample Trial Balance Worksheet
As with the monthly closing trial balance, the year-end trial balance is the rough draft of the financial statements for the year. In this subchapter, we show you how to prepare a worksheet that will take you from the trial balance through adjustments and onto the financial statements.
Using a Trial Balance Worksheet
When preparing financial statements, it can be very useful to have one schedule that shows the figures from the general ledger all the way through to the financial statements. This is the function of the trial balance worksheet. Although it can be used at the end of any period, it’s particularly helpful at year-end as a way of summarizing the steps in the process and catching errors. Setting up a trial balance worksheet is fairly simple. Basically, it’s just a way of putting every step of the summary and adjustment process onto one page.
The trial balance worksheet has several columns, with the trial balance taking up the first two-column section, followed by columns for adjustments, two columns for the adjusted trial balance, and final columns for the income statement and balance sheet. You can use either a 10- or 12-column worksheet, as shown in this partial trial balance worksheet:
GO PLACES CAMPING GEAR
TRIAL BALANCE WORKSHEET
12/31
A Sample Trial Balance Worksheet
What follows is a trial balance worksheet prepared by Go Places Camping Gear, Inc.’s accountant at the end of the year.
GO PLACES CAMPING GEAR
TRIAL BALANCE WORKSHEET
AS OF 12/31
In this table, the adjusted entries are as follows (entries 5 through 8 can be done in one entry, debiting the expenses and crediting the total to accounts payable):
• Record purchase of supplies, directly written off to expense. (1)
• Bad debts expense write-off of $1,276. (2)
• Record change per physical inventory, which represents cost of goods sold. (3)
• Record depreciation expense on office equipment. (4)
• Record insurance bill—accrual; note total of entries 5 through 8 credited to accounts payable. (5)
• Record utilities bill. (6)
• Record telephone bill. (7)
• Record advertising bill. (8)
• Record accrued payroll. (9)
To prepare a trial balance worksheet, first compute the balances in the general ledger accounts and post balances to the worksheet in the Trial Balance Debit and Credit columns. Add the columns. If they don’t balance—which is very common on the first try—look for errors. Be sure debits and credits are properly classified, look for transposed numbers, and so on.
Then prepare adjusting entries and put these into the appropriate Debit and Credit columns by accounts in the Adjustments section. Next, add the Adjustments Debit and Credit columns. If they balance, add to the account balances in the preliminary Trial Balance columns. Put the totals in the Adjusted Trial Balance Debit and Credit columns.
Finally, foot the Adjusted Trial Balance Debit and Credit totals. When they agree, you can take the assets and liabilities to the Balance Sheet section and the revenue and expense accounts to the Income Statement section to generate your financial statements.
By using a trial balance worksheet, you can follow transactions and adjust entries through the process because it puts all the information right in front of you. That makes it easier to trace back and forth from your financial statements if you need to, whether to make corrections or just to see how an account changed over the period.
11.4 Generating Financial Statements
The Income Statement
The Balance Sheet
The Statement of Cash Flows
In this subchapter, we look at producing statements for the year with a quick review of the balance sheet and income statement. In addition, we show you how to prepare the year-end statement of cash flows to find out how well you’re managing your cash.
The Income Statement
When you’ve arrived at your adjusted trial balance, you’re ready to compile your financial statements for the year. Here, too, the procedure is very similar to what you do if you generate monthly statements. If the totals of debits and credits in your adjusted trial balance are equal, you’re ready to put together your income statement. You can do this by simply placing the numbers from your adjusted trial balance into the income statement format. Net income can be computed directly on the trial balance worksheet and carried forward to both the income statement and the balance sheet.
SEE ALSO 10.7, “Generating Financial Statements”
Using the trial balance worksheet, Go Places Camping Gear, Inc., prepared the following income statement for the year:
By taking the revenue and loss account totals directly from the adjusted trial balance and using the standard format, we are able to see Go Places Camping Gear posted net income of $12,861 for the year. Having computed net income, Go Places can now complete its balance sheet, which we show you in the next section.
The Balance Sheet
When you’ve completed the trial balance worksheet, you can put the numbers in the Balance Sheet column into your formal balance sheet. Remember, accumulated depreciation is classified as a contra account, not a liability, and should be deducted from plant assets in the Assets section. See, too, how net income from the trial balance worksheet is transferred to retained earnings to get the report to balance.
SEE ALSO 7.2, “Depreciation”
As you learned in Chapter 1, the statement of cash flows (or cash flow statement) shows how your company is using its cash and where this cash comes from. It gives you an idea of whether your business has enough cash to pay its bills and meet long-term obligations. In addition to its obvious value to you, a cash flow statement is useful to creditors, investors, customers, vendors, and others interested in the financial position of your organization.
SEE ALSO 1.1, “Accounting Basics”
Preparing a Cash Flow Statement
To put together a cash flow statement, you need to look at documentation and reports generated during the closing process for the period. You’ll want to identify the sources and uses of cash, which fall into one of three categories: operating activities, financing activities, and investing activities. If you have a computerized system, this categorization will have already been done when you set up your chart of accounts, and you will be able to automatically generate a cash flow report.
Operating activities are those that primarily affect income, including sales and payments for products and expenses. These activities usually involve changes in current assets and liabilities.
Financing activities involve changes in long-term liabilities and equity.
Investing activities involve cash flows resulting from changes in investments or long-term debt.
The following table provides some examples of the different activities that fall into each category. You can use it as a reference when preparing your statement of cash flows.
There are different ways to prepare a statement of cash flows for your business. We take you through a very simple illustration for Go Places Camping Gear. To do that, we need its income statement (presented earlier) and a comparative balance sheet, which shows ending balances for last year and this year.
GO PLACES CAMPING GEAR, INC.
COMPARATIVE BALANCE SHEET AS OF 12/31
The first amount you need to identify is the net increase or decrease in your cash. You can determine this by subtracting the cash balance at the beginning of the period (in this case a year) from the ending balance. We know we ended with cash of $5,640. The beginning balance was $4,320 per our comparative balance sheet. So we have a net increase of …
$5,640 – $4,320 = $1,320
Now you must determine how much cash operations provided or used. One way of thinking of this step is that you’re basically adjusting items recorded on the accrual basis to the cash basis or net income to net cash. So you’d be looking at cash actually collected on receivables, as opposed to both cash and credit sales.
For Go Places Camping Gear, the following adjustments need to be made to get net income to net cash. Again, we can pull these numbers directly from the comparative statement:
1. Increase in accounts receivable of $5,640 must be deducted.
2. Increase in inventory of $4,670 must be deducted.
3. Increase in accounts payable of $69 do not represent a cash outflow and must be added back.
4. Increase in salaries payable of $1,870 also must be added back.
Now you can determine cash generated or used by investing: a decrease in PP&E office equipment of $1,000 represents a source of cash. Next, you determine cash provided or used by financing: a decrease in long-term payables of $5,000 represents used cash.
To determine its cash flow, a company must identify the sources and uses of its cash. Because most companies record revenues and expenses on the accrual basis, certain amounts must often be adjusted to identify where cash is actually going and coming in from. In the next section, we show how these adjustments are made.
SEE ALSO 2.2, “Timing”
A Sample Cash Flow Statement
By putting these numbers into a standard format for the statement of cash flow, we come up with the following.
GO PLACES CAMPING GEAR, INC.
STATEMENT OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31
| Net Cash from Operating Activities: | |
| Net Income | $12,861 |
| Noncash Items Included in Income: | |
| Increase in Accounts Receivable | ($5,640) |
| Increase in Inventory | ($4,670) |
| Increase in Accounts Payable | $69 |
| Increase in Salaries Payable | $1,870 |
| Depreciation Expense | $830 |
| Net Cash Flow from Operating Activities | $5,320 |
| Cash Flow from Investing Activities: | |
| Sale of Office Equipment | $1,000 |
| Net Cash Flow from Investing Activities | $1,000 |
| Cash Flow from Financing Activities: | |
| Repayment of Long-Term Notes | ($5,000) |
| Net Cash Flow Used by Financing Activities) | ($5,000) |
| Net Increase in Cash | $1,320 |
| Cash at Beginning of Period | $4,320 |
| Cash at End of Period | $5,640 |
| NET INCREASE IN CASH | $1,320 |
Math check: if you have done your cash flow statement correctly, the net increase or decrease in cash at the end of the period should be the difference between the beginning and ending cash balances in your accounting records.
Go Places has a positive cash flow of $1,320. It earned income last year and currently has no long-term debt, which puts it in a healthy financial position. However, if it suddenly needed an infusion of cash, things could be tight, so the company should continue looking for ways to boost revenues and keep a line on expenses if it wants to grow.
Closing Entries
The Profit and Loss Account
The Retained Earnings Statement
After you have completed the financial statements, only one step remains in the closing process—closing out temporary accounts and opening new books so revenues and expenses can begin accumulating again in the next period. In this subchapter, we discuss the purpose of closing entries, the accounts they affect, and how to prepare them, and how to open new books for the next period.
Closing Entries
All revenue and expense accounts are considered temporary holding accounts for activity during the period. As a result, these accounts must be closed at the end of the year so they have zero balances at the beginning of the next year. You will close them first into the profit and loss account and then transfer the resulting net income or loss into retained earnings.
A profit and loss account, or income summary account, is the account all revenue and expense items are closed into before they become a part of retained earnings.
Retained earnings is the permanent balance sheet account used to reflect income and losses from each year since the business began. It’s a part of owner’s equity.
The Profit and Loss Account
To close out revenue and expense accounts, you must first transfer their balances into the profit and loss account. This is a matter of debiting revenue balances and crediting expense balances, as shown in the following journal entries for Go Places Camping Gear, Inc.
These entries are usually combined into one entry, wherein the net difference is debited or credited to the profit and loss account. This would result in the same debits to sales and credits to cost of goods sold and individual expense accounts. The difference of $12,861 would be credited to profit and loss account 299.
Following the entry, the profit and loss account in the general ledger appears as follows:
The next step is to transfer the balance in the profit and loss account to retained earnings. In some small businesses the profit and loss account is closed directly into the capital account. In the case of Go Places Camping Gear, the company closes accounts by transferring the profit and loss account balance to retained earnings.
It’s worth noting here that most computerized accounting systems automatically adjust your income and expense accounts and post the net income to retained earnings. At the start of your new fiscal year, the retained earnings balance increases by the net income on your year-end balance sheet.
SEE ALSO 15.4, “Converting to an Automated System”
The Retained Earnings Statement
All public companies are required to prepare a retained earnings statement. The purpose of this statement is to show changes in this account during the year. These typically include the following:
• Net income or loss
• Prior period adjustments for errors that resulted in over- or understatements of income
• Dividend distributions to shareholders
Prior period adjustments are adjustments for errors in past financial statements that must be corrected in current reports.
Retained earnings statements are also useful for closely tracking the entry of net income on the balance sheet. For example, assume Go Places had miscalculated cost of goods sold in the previous year. At the end of the current year, it would record the following correcting entry and retained earnings statement:
GO PLACES CAMPING GEAR
RETAINED EARNINGS STATEMENT
FOR THE YEAR ENDED 12/31/12
| Balance 1/1/12, as Reported | $4,649 |
| Correction: Overstatement of Net Income Due to COGS Error | ($1,009) |
| Adjusted Balance, 1/1/12 | $3,640 |
| Add: Net Income (for Y/E 12/31/12) | $12,861 |
| Less: Dividends | $0 |
| Balance, 12/31/12 | $16,501 |
After you’ve completed the retained earnings statement, you can adjust the balance in retained earnings on your company’s balance sheet. If this were an actual error, Go Places would have to reduce inventory by $1,009 to $9,871 and retained earnings to $16,501 as noted.
After you’ve closed revenue and expense accounts for the year, you can transfer their balances into a profit and loss account. This account is then folded in retained earnings—an equity account on the balance sheet. Sometimes retained earnings may need to be adjusted with corrections or adjustments from the prior period. When this is done, its balance goes into the retained earnings general ledger account and the balance sheet.
Summaries and Schedules
Other Documentation
In addition to the statements covered already in this subchapter, there are additional reports you might prepare at year-end. Some of these schedules assist you in analyzing accounts and performance; others help you get a jump on tax season. Here we list some of these documents and show you how to put them together.
Summaries and Schedules
Other useful reports focus on activity in particular areas and accounts. For public companies, some of these, such as the schedule of fixed assets or schedule of operating expenses, are included as part of the financial reports. If you have an outside accountant coming in or just want to better analyze your results, these additional schedules can be useful.
The Schedule of Fixed Asset Acquisitions
This schedule tracks additions to fixed assets to be sure costs are properly accumulated and monitored. A typical fixed asset schedule could look like the following:
GO PLACES CAMPING GEAR
SCHEDULE OF FIXED ASSETS
12/31
| Office Equipment | |
| Balance at 1/01 | $16,000 |
| Acquisitions: | |
| Disposition: 1/31/01 | ($1,000) |
| Balance at 12/31 | $15,000 |
| Accumulated Depreciation | |
| Balance at 1/01 | ($1,170) |
| Add: Depreciation Expense: 12/31 | $830 |
| Balance at 12/31 | $2,000 |
| Office Equipment Book Value: 12/31 | $13,000 |
The schedule of fixed asset acquisitions can be used to check for proper asset valuation and calculation of depreciation. In addition, reviewing plant, property, and equipment can help you plan for upcoming repair and replacement costs.
SEE ALSO 7.1, “Property, Plant, and Equipment”
SEE ALSO 7.2, “Depreciation”
SEE ALSO 7.3, “Disposal of Fixed Assets”
The Schedule of Operating Expenses
This report provides a quick snapshot of a company’s expenses. It’s typically put together using annual expenses by type. Sometimes these are compared to prior periods. A schedule of operating expenses for Go Places appears as follows:
GO PLACES CAMPING GEAR
SCHEDULE OF OPERATING EXPENSES
12/31
| Salaries | $32,250 |
| Rent Expense | $6,500 |
| Telephone Expense | $840 |
| Utilities Expense | $2,725 |
| Insurance Expense | $800 |
| Advertising Expense | $600 |
| Office Supplies Expense | $355 |
| Depreciation | $830 |
| Bad Debts Expense | $1,276 |
| Total Operating Expenses | $46,176 |
You can also prepare this schedule as a comparative between years or between specific months of different years. The schedule of operating expenses is useful in computing taxes as well.
The Expense Report Summary
This document—again particularly useful for tax purposes—allows you to quickly analyze staff expenses. It can be done in a macro sense month by month for the company as a whole. You can also run expense report summaries that list expenses by account for each employee to get an idea if anyone’s expenses are unusual or seem out of line compared to others.
GO PLACES CAMPING GEAR
EXPENSE REPORT SUMMARY—JUNE
Other Documentation
In this section, we cover some other useful reports you may have already prepared in the past. They’re listed with references to the appropriate chapter, so you can find them easily.
Bank Reconciliation
Bank reconciliation does what it sounds like: brings your bank balance and your book balance in line. It’s usually prepared monthly, so errors can be caught quickly. Auditors sometimes review previous reconciliations to check for unusual items or errors and verify that account activity is normal.
SEE ALSO 2.4, “Recording in Journals”
SEE ALSO 3.4, “Preparing a Bank Reconciliation”
The Accounts Payable Schedule
The accounts payable schedule lists payables by due date and can be used to evaluate how efficiently bills are being paid. It is also useful for confirmation requests.
SEE ALSO 6.2, “Accounting for Purchases”
Aging of Accounts Receivable
The accounts receivable aging schedule is prepared more frequently in big companies, where it’s usually used to evaluate collections.
SEE ALSO 4.3, “Accounts Receivable”
This catchall category includes discontinued operations—such as losses or gains from dumping a product line or selling an unprofitable division. Also here are extraordinary items, which are material one-time items that are both unusual and unlikely to reoccur. In this case, material means big enough to matter—like the write-off of inventory after a major earthquake.
Tax Records
There’s no time like after year-end to get the necessary records safely in a pile for tax time. In addition to receipts, invoices, and the like, you’ll need tax forms and details of itemized deductions and a schedule or list of charitable contributions.
SEE ALSO 12.1, “Advanced Planning”
Closing your books at year-end needn’t be that difficult if you follow the appropriate steps. You summarize transactions to journals and make any necessary adjustments to the general ledger. Accounts must be reconciled and balanced and financial statements generated, including the balance sheet, income statement, and cash flow statement. When this is complete, you can close revenue and expense accounts and prepare your books for business in the next period.
In addition, you’ll want to ready yourself for tax season, gathering records and putting together schedules for items such as expenses and charitable contributions, so you won’t have to scurry around at the last minute.