The year-end close can feel overwhelming for finance and accounting teams. It’s that time when accuracy, deadlines, and a hefty to-do list collide, often coinciding with month-end and quarter-end reporting. It’s no wonder the process takes over a month for many companies, though some organizations manage to wrap things up in under ten days by tackling relevant tasks consistently throughout the year.
Let’s talk about the essentials of year-end closing, share a checklist to help you stay on track, and look at how you can make the process less of a headache.
What Is Year-End Closing?
Year-end closing is about ensuring your company’s financials are accurate and ready for tax reporting, regulatory compliance, and strategic planning. This involves reconciling accounts, adjusting entries, and preparing financial statements. Think of it as a detailed financial review for the entire fiscal year.
Unlike monthly or quarterly closes, the year-end close reviews everything, from income and expenses to assets, liabilities, and equity changes. The ultimate goal? Accurate financial statements that represent your business’s activities and position for the year.
Unlike the monthly close, this one covers the big picture of your finances to ensure everything is accurate for tax purposes and future planning. Starting early can save you a lot of stress. You’ll have reliable data to work with for tax calculations and avoid the scramble of last-minute deadlines.
Why Is It So Tough?
Several factors make year-end closing tough:
- Missing or incorrect documents like receipts and invoices.
- Errors caused by stress or burnout.
- Manually managing complex transactions involving multiple currencies or parties.
- Miscommunication about who handles what leads to delays and mistakes.
Your Year-End Close Checklist
Here’s a breakdown of the steps to get through the year-end close:
1. Build Your Close Schedule
A financial close schedule is basically your game plan for wrapping up the year-end close. It lays out all the tasks you need to tackle and when to do them, helping your team stay on top of things and work in sync.
To get started, make a list of all the key activities involved in the year-end close. This could be reconciling accounts, reviewing assets and liabilities, and anything else that needs attention. Once you’ve got that, use something like Excel or a project management tool to build a timeline. Assign tasks to your team, add any notes they might need, and set deadlines to keep everyone moving forward.
Some companies don’t have a clear process for this, and that’s where things get tricky—people end up relying on memory, which can lead to mistakes and delays. But if you take the time to document everything, even if your process isn’t perfect, you’ll save yourself and your team a lot of hassle in the long run.
2. Collect Financial Records
To wrap up your year-end close, start by gathering all your financial records. Here’s what you’ll need:
- Bank statements
- Credit card statements
- Inventory counts
- Last year’s tax return
- Loan account statements
- Merchant statements
- Payroll reports
3. Reconcile Bank Statements
This step is all about making sure your cash balances are spot on. You’ll need to catch any mistakes or missing entries and update any transactions that haven’t been recorded yet. Simply match each transaction from your bank statements with the corresponding entry in your general ledger, and look for anything that doesn’t line up.
4. Review Payables and Receivables
Accounts payable is basically the money your business owes to suppliers or other third parties, while accounts receivable is the cash you’re expecting from customers.
When it comes to closing out your books, a big part of the job is making sure both of these are accurate. That means going through unpaid bills, invoices, and payments from vendors and customers to confirm everything matches up and reflects what’s actually owed.
This is where automation can be a game-changer. With account reconciliation software, most of the matching is done for you, and it flags only the items your team needs to review, saving time and reducing headaches.
5. Evaluate Assets
Make sure your financial statements show the real value of your assets. This includes things like factoring in depreciation and valuing your inventory properly, so your balance sheet and income statement are accurate.
To get started, gather information on all your company’s assets, such as:
- Tangible items like property, equipment, vehicles, and furniture
- Intangible items like patents, trademarks, and copyrights (only the ones your company bought, not ones you created, go on the balance sheet).
Take a close look at the value of each asset and double-check that everything is accurate and up to date.
6. Calculate Depreciation
Depreciation is just a way of recognizing that assets lose value over time. It reflects how long something stays useful and valuable for your business while accounting for things like wear and tear, becoming outdated, or just losing value naturally.
A straightforward way to calculate this is the straight-line method. Here’s how it works:
- First, figure out the asset’s useful life—basically, how many years you think it will benefit your company. If you have past data on similar assets, that’s a great place to start. You can also look at industry guidelines or benchmarks from regulatory or professional organizations to get an idea.
- Next, estimate the salvage value—that’s what you might get for the asset if you sell or dispose of it once it’s no longer useful. Subtract that salvage value from the original cost of the asset, and you’ll have the total amount to be depreciated over its lifetime.
- Finally, divide that number by the useful life to figure out how much depreciation you’ll record for each year. It’s a simple way to spread the asset’s cost over its useful years!
7. Inventory Valuation
Figuring out your ending inventory—how much sellable stock you have left at the end of the year—gives you a clearer picture of your current assets, gross profit, and whether your inventory buying and production matched up well with demand.
This ending inventory gets listed as a current asset on your balance sheet. At the same time, the cost of the items you sold during the year is deducted from your ending inventory and added to your cost of goods sold (COGS) on your income statement.
To calculate your ending inventory, just use this simple formula: beginning inventory + net purchases – COGS.
If you’re using a template, it can do the math for you. Plus, it can help you plan ahead by forecasting future inventory needs based on trends like what you’ve bought, and used, or how demand has shifted.
8. Prepare the Income Statement
Your income statement (also called profit and loss statement) summarizes revenues, expenses, and net income or loss. Reconcile adjustments and ensure all figures are correct.
9. Compile the Balance Sheet
Your balance sheet gives you a clear snapshot of where your company stands financially over the fiscal year. It’s like a big-picture view, breaking things down into two main categories:
- Current Items – These include short-term assets like cash, accounts receivable, inventory, and prepaid expenses, along with short-term liabilities like accounts payable, short-term loans, and accrued expenses.
- Non-current Items – These cover long-term assets like investments and liabilities such as long-term debt and deferred tax liabilities.
Using the template, you can see all your assets, liabilities, and equity neatly laid out in one spreadsheet. Plus, it makes it easy to check important financial ratios, like the quick ratio, current ratio, total debt-to-equity ratio, and long-term debt-to-equity ratio, at a glance.
10. Organize Tax Documents
Getting ready for tax season means thinking ahead about a few key things. First, you’ll want to look at when you’re recognizing income and expenses to make sure the timing works in your favor. Then, see what tax credits and deductions you qualify for—you don’t want to miss out on those. It’s also a good idea to use strategies like deferring some income or speeding up expenses to keep your tax bill as low as possible.
Planning early during your year-end close can really pay off. It helps you get your tax situation in order, minimizes risks, and ensures you follow the rules. To wrap up this step, gather all the tax documents you’ll need, like W-2s, 1099s, and any other forms. Double-check that everything is complete and accurate so there are no surprises later on.
11. Verify Payroll Records
Gather up all your payroll documents from the year—things like payroll registers, timesheets, employee records, tax forms (like W-2s and 1099s), benefit enrollment forms, and anything else related to payroll. Take a good look to make sure everything is accurate.
Then, check for any changes that happened during the year, like updates to employee pay, tax withholding statuses, or payroll policies. Double-check that these changes were applied correctly. Finally, compare your payroll records with other financial documents, like your general ledger, bank statements, and tax filings, to make sure everything matches up.
12. Audit Employee Expense Reports
Collect all the employee expense reports submitted for reimbursement over the year. Make sure you’ve got all the necessary paperwork, like receipts and any other supporting documents.
13. Reconcile Loans and Credit Cards
Check over loan balances and credit card statements to make sure everything lines up. Double-check that interest and principal payments are recorded correctly!
14. Review Contracts and Agreements
Go through all the contracts and agreements your business entered into over the year—this includes deals with vendors, clients, suppliers, partners, landlords, and anyone else you’ve worked with. Take some time to review each contract’s details, like payment terms, what’s expected from both sides, cancellation policies, warranties, and how disputes are handled.
Make note of any financial commitments, such as the contract value, payment schedules, and billing cycles, and make sure all this information is properly recorded in your files.
15. Address Overdue Invoices
Start by pulling together an updated accounts receivable aging report to spot any overdue invoices and aging balances. These reports typically break down outstanding receivables into categories like 30 days, 60 days, 90 days, and over 90 days past due.
Once you have the report, take a close look at the payment history for each account. Are there any overdue invoices you might be able to collect before year-end? If so, prioritize those first.
For the remaining balances, think about things like past payment behavior, any communication you’ve had with the customer, and whether there are disputes or other issues that could delay payment. Based on this review, estimate how much of the receivables are unlikely to be collected. If necessary, set up a bad debt provision for the ones you don’t expect to recover.
16. Adjust Ledger Accounts
Take a close look at each transaction in your general ledger accounts to make sure everything is recorded, categorized, and summarized properly based on your chart of accounts. Then, double-check these transactions against supporting documents like bank statements, invoices, and receipts to confirm they line up.
If you’re not already using account reconciliation software, now’s a good time to make your life easier. Here’s how it helps:
- It pulls transaction data from multiple sources, like your ledger, bank statements, invoices, and receipts, into one platform.
- You can set up matching rules based on things like transaction amounts, dates, descriptions, and account codes.
- The software automatically compares ledger transactions with related documents to flag any discrepancies.
- Finally, it gives you a clear summary of what’s been reconciled, what’s still outstanding, and where you stand overall.
It’s a big time-saver and reduces the chance of manual errors!
17. Prepare the Cash Flow Statement
Getting your cash flow statement ready means breaking down the money coming in and going out across three main areas: operating, investing, and financing activities. How you figure out your cash flow depends on whether your company follows the direct method or the indirect method.
18. Document the Process
Having a financial close schedule is like having a game plan—it helps you stay on track and get everything done within the timeframe you’ve set.
But it’s equally important to document how the year-end close actually goes. This means keeping detailed records of what was done, when, and by whom.
Some companies skip this step and end up relying on memory, which can lead to confusion and extra work. Even if your close process isn’t perfect, taking the time to document it now will save your team from unnecessary headaches down the road.
19. Plan for the Next Year
Look back at how this year’s year-end close went, pinpoint areas where things could be smoother, and set some goals for next year’s process. Think about which tasks you can tackle earlier to make everything run more efficiently.
20. Implement Process Improvements
Take what you’ve learned and make changes to improve next year’s close. This could include:
- Automating repetitive tasks like account reconciliation
- Introducing or updating financial software
- Providing additional training for the team
- Streamlining communication with clear roles and deadlines
Think of this as the “reset button” that helps you transition into the new year with a more efficient and stress-free workflow.
Don’t be Overwhelmed
Getting through the year-end close doesn’t have to be overwhelming. By following a clear checklist, gathering your documents early, and leaning on tools like automation software, you can simplify the process and wrap things up efficiently. Take the time to evaluate what worked well and what could be better, so next year’s close feels like less of a challenge.
