Closing at Year End
United Kingdom
Procedures for Year End
The trial balance is extracted from the ledger accounts by obtaining a
balance for each account.
If the balances do not give a balance then the difference is placed in a
suspense account.
The cause of any such difference must be investigated and corrections
made before proceeding.
Once the trial balance balances the next step is to proceed to make any
necessary adjustments.
Adjustments
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Accruals
Prepayments
Bad Debts
Provision for Doubtful Debtors
Depreciation
Closing Stock
Accruals
Any invoices received after the trial balance has been obtained which relate to
the previous period should be included in the accounts.
Where there is no invoice, but the sum involved is substantial then it should be
fairly estimated and included.
Matching expenditure to the relevant accounting period is an example of the
accruals concept.
The appropriate expense or purchases account is debited and the accruals
account is credited.
Prepayments
Income should also be matched to the correct financial period, the process of
making this adjustment is one of calculating prepayments.
For example, if the financial year ended on December 31st and premises
insurance for 12 months was paid of September 1st:
4 months of premises insurance have been used, but the remainder of the
payment relates to premises insurance for the forthcoming period.
This amount is calculated and entered as a prepayment.
The entry must be to debit the prepayment account and to credit the appropriate
expense or other account.
Bad debts
At the end of any year it is likely that there will be a number of debtors from
whom it is unlikely that revenue will be recovered from. This may be because
they have gone out of business or because all means of trying to recover the
money have failed.
The procedure is to credit the debtors account (accounts receivable) and to
debit the bad debt expense account.
If the bad debt is older than 6 months from the date that the invoice was due to
be paid then the VAT can also be recovered.
Should the debt later be recovered then a further entry is made to the
accounts.
Provision for doubtful debtors
Where it is determined that a number of debtors will become ‘bad’ (i.e. will
not be recovered) then a provision is made in the accounts for doubtful
debtors.
This provision usually represents a percentage of total debtors after writing
off any bad debts.
Since the total of the debtors will vary from year to year then the he
provision.adjustment will be made each year. The adjustment takes into
account the change in the total of t
Depreciation
The provision for depreciation is calculated each year for nearly all fixed
assets. The provision is recorded as a credit in the Accumulated Depreciation
Account (a balance sheet account) and as a debit in the Depreciation Expense
Account (an expense account).
The method by which depreciation is calculated for each asset is determined
when the asset is first purchased. Under normal circumstances this method of
depreciation should not change.
Closing Stock
Adjustments are made to determine the valuation of the closing stock. The
method for doing this will usually be by a physical stock take and then using
FIFO or AVCO.
For some businesses a determination is made of the work in hand. This is
considered in a similar way to closing stock.
Both closing stock and work in hand appear as assets on the balance sheet.
Partnerships
Once the net profit has been determined then the closing procedure to set out
the financial statements will involve:
Setting out the current accounts for each partner
Setting out the capital accounts for each partner
This must be done in accordance with the partnership agreement.
Companies
Calculation of taxes is carried out.
Any dividends to be declared are determined.