On Year-End Closing
Posted 12/31/2024
Happy holidays everyone! As we approach the end of the year, it’s time to reflect upon our lives and our work, and set goals for the new year.
To that end, let’s talk about closure. Specifically, year end closing for your books.
For a small business, closing the books for the year is essential. But how is year-end closing different from just regular bookkeeping? Or from monthly closing? Let’s discuss and shed some light on the process.
Why Closing Matters
Closing is the finalizing and locking of the books for a given time period. Besides just getting caught up on any outstanding tasks, closing may involve bookkeeping tasks that are not regularly performed on a daily basis. For example, closing may involve updating the depreciation of an existing asset. It may also include counting inventory, or checking the condition of equipment.
Closing is important for 3 reasons:
It is an opportunity to ensure that the books reflect the reality of a business.
It prevents errors from being made too far in the past, thus creating a cascade of further errors that takes valuable time to fix.
It ensures that the books match any financial reports that may be generated for purposes such as taxation, loan applications, leasing agreements, etc. If your books from a certain time period do not match the reports you previously gave, that can be a big red flag for your business to be audited.
When to Close
There is no set rule on when to close the books for a business, but standards should be based in relation to the closing date. In this context, the closing date means the final day of the period the closed books will reflect. In some companies, the standard is 15 days past the closing date. In other companies, it is one month and 15 days after the closing date. In this later example, if you were closing the books for January of this year, the closing date would be January 31st. The target date for completion of closing would therefore be March 15th.
I personally try to close monthly by 15 days past the closing date. As for yearly closing, it is not uncommon to end up waiting for certain documents or messages from CPAs to come in before closing can be finalized. Therefore, I don’t give a specific time frame for yearly closing, but I would certainly like to get it done within 2 months of the closing date at the latest.
Closing also depends on your fiscal year. Many companies have a fiscal year that aligns with the calendar year, but some don’t. If your company has a fiscal year that doesn’t align with the calendar year, then you can treat the end of December as just another month.
Monthly Closing vs Yearly Closing
What is the difference between monthly and yearly closing? Well, there is quite a bit of overlap between the two. Yearly closing involves all the same steps as monthly closing, but includes some additional steps. Think of it like spring cleaning! You may have a monthly cleaning routine where you vacuum any exposed floors in your house. But you probably want to set aside at least one time a year where you go above and beyond. You still vacuum, but this time you’re actually moving the furniture around to get all the hard-to-reach spots. It’s a lot of work, but if you don’t do the cleaning then you can find a real mess building up over time.
How to Close
The specific tasks that are associated with closing vary with the specific company. For example, earlier I mentioned that a closing task may be counting inventory. But of course not every business has inventory, so the process will be a little different for them.
Even so, most accountants and bookkeepers will keep a checklist of tasks to complete for closing. My general year-end closing checklist looks a little like this:
Classify Transactions
Reconcile Accounts
Update Inventory
Write off uncollectable accounts receivable
Run Accounts Payable report and void any invalid bills
Run Balance Sheet and note significant changes. Be sure to have some source document for each account.
Run Profit and Loss and note significant changes. Look for miscategorized transactions.
Reclassify previous transactions as necessary
Update Vendor information for 1099s
Update list of fixed assets
Make adjustments to asset depreciation (as indicated by CPA)
Write off fully depreciated assets
Match AR and AP report to Balance Sheet
Lock the books
Generate Financial Reports
Of course this list may change a bit with businesses that have specific needs, but it still works as an outline for my workflow.
What If Something Needs to Change?
I am often asked if changes can be made to the books once they have been closed.
My standard answer is: “Yes, but it’s not usually a good idea.”
I try to avoid re-opening a closed month or year wherever possible. Remember those 3 benefits of closing that I mentioned earlier? Re-opening the books repeatedly negates all 3 of them. It is usually better to leave the books as is once they are closed and then make adjustments going forward.
If the books really need to be reopened, then it is important to catalog any changes that are made post closing. Furthermore, the books should be re-closed as soon as possible. If there were changes to the profit and loss or balance sheet, then new financial reports should be generated to replace the previous ones.
Remember: Just like spring cleaning, closing the books is an important part of maintaining healthy conditions for you and your business. If you want to know more about how to close the books for your business, click here.
Thanks for reading, and here’s to a great 2025!