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STRATEGIC ISSUES...ONLINE 
For week of January 2, 2006, Issue #243
 

Featured Article:

Year-End Closing Procedures
If you would like to have further information on any of these articles, let us know.  We would appreciate receiving your comments and/or suggestions, anytime!
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Year-End Closing Procedures
 
The year-end closing process is a crucial and sometimes stressful time as owners and members of management anxiously await the financial reports that show the company's operating results for the year.  Here's  quick rundown of year-end closing procedures for CPAs who help their clients with that process.
 
Complete All Payroll Processes
 
Make sure that all payroll processes have been completed before proceeding with the close.  Those processes include processing all payroll checks for the current payroll year (through December 31) and preparing, reconciling, and filing Forms 1099 and 1096 and all payroll reports, such as 941s, 940, and Forms W2 and W3.
 
Verify That All Transactions Have been Recorded and Posted
 
Although the types of transactions encountered may vary with each company, the basic steps necessary to review the transactions for completeness generally do not vary significantly from company to company or from period to period.  Scan the ending balances and the transactions posted to each general ledger account to detect unusual entries or unexpected ending balances.  Also, many software packages may not allow the user to "close" the books until all entered transactions have been posted.
 
Reconcile All General Ledger Accounts and Make Necessary Adjustments
 
When reviewing the general ledger, many year-end balances will need to be adjusted.  The following procedures should be performed when reconciling the general ledger accounts:
 
-Agree ending general ledger cash balances to ending bank reconciliation balances.
 
-Agree ending general ledger credit card liability balances to ending credit card statement reconciliations.
 
-Agree the ending accounts receivable balance to the total of the Aged Receivables Report.
 
-Agree the ending accounts payable balance to the total of the Aged Payables Report.
 
-Adjust inventory quantities to agree with physical inventory counts and adjust the balances in the inventory account to lower of cost or market if necessary.
 
-Compute bad debt expense, accounts receivable, and allowance for doubtful accounts by using the allowance method.
 
-Verify that fixed asset sales are recorded correctly.
 
-Capitalize and amortize prepaid assets.
 
-Calculate and record depreciation on fixed assets.
 
-Record interest expense on loans and notes payable.
 
-Adjust marketable securities to fair value.
 
Review All Vendor and Customer Accounts for Inactive Accounts
 
Year-end is a good time to clean up vendor and customer records.  When inactive vendors or customers are identified, consider making them inactive in the accounting system to prevent accidental postings to them.  Most software packages allow that command.
 
Print Year-End Reports
 
The following reports should be printed to have a record of historical transactions for the year.  They also may be useful during the coming audit or review of your financial statements.
 
-Accounts receivable.  Reports that should be printed include a sales journal, a cash receipts journal, customer ledgers, customer statements, an aged receivables report, taxable/exempt sales report, and an invoice register.
 
-Accounts payable.  Reports that should be printed include a check register, an aged payables report, and Forms 1099.
 
-General ledger.  Reports that should be printed include a trial balance and a general ledger report.
 
-Payroll.  Reports that should be printed include a payroll check register, quarterly earnings report, yearly earnings report, payroll tax reports, state quarterly report forms, and federal forms (940 EZ, 941, W2 and W3).
 
-Inventory.  Reports that should be printed include an inventory valuation report, item costing report, inventory unit activity report, and an inventory profitability report.
 
Of course a balance sheet, cash flow statement, and income statement also should be printed and copies maintained.
 
Back Up Company Data
 
Before running a general ledger "Close" feature, back up all company data files.  Once the closing process has begun, it generally cannot be stopped.  If anything goes wrong, having a backup that can be restored may be the only way to undo the close.
 
Run the General Ledger Software Package Close Feature
 
Once all of the proceeding steps have been followed, the general ledger must be "closed."  When closing a fiscal year, most software packages make many of the closing entries automatically.  For example, they zero out income and expense accounts so that the new fiscal year begins with zero net income and post income and expense balances to the appropriate equity (retained earnings)accounts.  In addition, general ledger software generally resets to zero all vendor, customer, and employee year-to-date totals.  Typically, once the fiscal year is closed, users cannot access or edit transactions posted to the general ledger for that year.  Therefore, all transactions, including adjusting journal entries, should be posted before closing the fiscal year.
 
Purge Data, if Desired
 
As companies use their accounting software year after year, the size of data files may grow so large that the software runs more slowly.  In that case, consider purging old transactions and inactive accounts from data files.  Purging such accounts reduces the size of the company's files and frees file space for processing current and active data.
 
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