An Expert’s Guide to the Year-End Close Process

As the year winds down, it’s essential for businesses to take a proactive approach to their year-end accounting and financial reporting processes.

A well-executed year-end close process ensures that accounting records present the most accurate picture for the end user, whether it be internal management, investors or your accounting firm.

Closing the books in a timely and systematic way will allow a business to wrap up the previous year and set a strong foundation for the upcoming year. To ensure your business closes its books accurately and is well-prepared for the year ahead, we’ve compiled the considerations below to guide you in your year-end accounting process.

Unlike typical month-end closes, consider keeping your books open a bit longer for the year-end close. This ensures that any late-arriving bills will be included in the period to which they apply. Sometimes, leaving the books open for an extra few weeks still isn’t enough for the slowest of vendors. In this case, an accrual should be made to record the expense that was incurred during the prior year but for which the bill is still pending. In cases where the exact amount is unknown, it is recommended that an estimate be made. A valuable tip for tracking estimated accruals is comparing recurring vendor bills/expenses against what has been received and what hasn’t.

It’s fundamental to reconcile all bank, credit card and investment accounts. Although this should be a monthly task, it is a step that is especially important as part of your year-end close checklist. When a statement has a cut-off date in the middle of the month (as many bank and credit cards do), the best practice is to reconcile to December 31^st to ensure that all activity is captured in the current year. This stub period data can usually be obtained through the online bank or credit card portal. Any uncleared transactions, especially checks, should be reviewed to determine if they are valid. In reviewing outstanding checks, it is important to be aware of state laws regarding unclaimed funds as this can determine what can be voided and where reissuances are necessary.

The next item in the year-end checklist is to review outstanding customer receivables, paying special attention to older items. If receivables are deemed uncollectible, year-end is a good time to write them off to start fresh in the new year. For items that are not deemed uncollectible but for which collection is questionable, the best practice is to adjust the allowance for doubtful accounts to reflect this.

Scrutinize the prepaid expense schedule. Prepaid expenses represent amounts paid in advance for goods or services not yet received. It is important to review what is currently on the balance sheet to determine if any of the items should be expensed. Conversely, it is important to review bills that have been paid for which the goods and/or services have not yet been received.

Cross-reference the fixed asset listing against tangible assets still in your possession. If you identify fixed assets on your listing that you no longer have, they should be written off, along with the applicable accumulated depreciation. Income statement accounts (specifically repairs and maintenance) should be reviewed for any capital assets that were incorrectly expensed. Once your listing is complete and accurate, current year depreciation expense should be calculated and recorded.

Year-end is a good time to review your accounts payable aging with a special focus on bills over 90 days past due. It might be prudent to settle some of the old outstanding bills, especially if a business is a cash-basis taxpayer. Any invoices that will not be paid should be written off.

Loan account balances should be reviewed and agreed to year-end statements. As part of this review, it is important to make sure that the correct portion of your payments throughout the year have been recorded to principal, interest and any applicable escrow accounts. The related escrow accounts should also be analyzed and any activity recorded. Often, real estate taxes or insurance are paid using funds held in escrow. These payments are expenses for the company and should be reflected in the income statement.

An analytical review of the income statement is a critical step at year-end. Monthly and annual trends and fluctuations should be reviewed against prior years to identify any outliers or unexpected results. These unexpected amounts should be investigated, as they will often indicate that something is not properly recorded. Changing patterns can also help businesses identify market shifts that can be helpful in planning for the future.

It is best practice that supporting schedules be maintained for all balance sheet accounts. This will allow the accounting team to ensure that activity has been reviewed in detail and balances fully substantiated. It will also help the accounting team be prepared for questions that may arise from the users of the financial statements. If a complete closing package is prepared and reviewed, it will make answering questions easier and more efficient for all parties.

The recommended best practice for an accounts payable process is to require a copy of a vendor’s 1099 prior to issuing their first payment. While this can be challenging due to payment deadlines, it can save significant time at the end of the year. When W-9s are obtained, the accounts payable team should review them to determine whether or not the vendor will require a 1099 at year-end, and the vendor should be tagged in the system (or tracked in a pre-determined way). The deadline for filing 1099s with the IRS is January 31^st so maintaining this process throughout the year will alleviate significant pressure during the month of January.

To ensure you’re fully prepared for the upcoming 1099 filing season and learn what’s new for 2024, check out our comprehensive guide here.

Closing the books and records for the year is focused on looking back at the year and making sure the accounting reports provide an accurate picture from a financial perspective. The financial information, however, is not limited to use in historical reporting. Having clean and accurate books can be used as the basis in developing budgets and forecasts for future years. The most recently closed books can provide the best insight into trends and allow businesses to leverage opportunities for growth and improvement. Companies should develop goals for future years that are supported by the trends shown in the financial statements.

The year-end close is a crucial period for businesses. While it might seem daunting, a systematic approach, as laid out above, can ensure that the year-end close process is efficient and results in accurate financial statements. Prioritize accuracy, transparency and thoroughness, enabling your business to step into the new year confidently.