Accounting

Closing Strong: Best Practices for a Streamlined, Effective Year-End Close

And just like that, it’s that time of year again. The presents are (mostly) wrapped, holiday plans are (somewhat) solidified, and New Year’s resolutions are percolating (yeah, let’s go with “percolating,” for now). But, as all accountants know, this end-of-year pomp and circumstance only mean one thing: The year-end close and the annual audit are coming.

Given all the hard work and sacrifice typically associated with the process, it might be easy to overlook, but the year-end close is a critical time for accounting teams. While other departments are looking ahead to next year’s goals, the accounting team needs to wrap up last year and ensure managers, investors, regulators, auditors, and other stakeholders have accurate financial data.

If you put it like that, this time of year can seem less stressful and more…empowering?

Put me in coach; I’m ready to play.

Let’s take a look at a handful of best practices that can help you achieve a successful year-end close and prepare for the year-end audit.

The Early Bird

One of the most challenging aspects of year-end is the time-crunch. As soon as the holidays are over, the accounting team needs to wrap up year-end, issue W-2s and 1099s, and schedule the year-end audit — not to mention getting started on January’s monthly close.

(If you’re looking for a prettttty good explanation for your friends and family who don’t get why the first quarter-or-so of the year are so stressful) 

Ideally, the year-end close planning should start months ahead of December 31. Around September, review the timing of year-end holidays, confirm staff vacation plans, and start planning your close schedule. This is really where having a hyper-efficient month-end close comes in handy. Sure, it makes the monthly close process easier to manage, but it can also minimize the time crunch generally associated with the year-end close by preparing the team throughout the year.

Have a Master Checklist

A robust and comprehensive close checklist is critical for ensuring you have a step-by-step workflow to follow and that nothing falls through the cracks. It can also help keep your close on track by establishing who is responsible for which tasks and setting deadlines to stay on schedule. 

What close checklist, you ask? Start with our customizable month-end close checklist. Adapt it to fit your organization by checking with each team member involved throughout the close process. Chances are, they’ve already created their own individual task lists, so you can consolidate those separate lists into one master list and refine it. 

Schedule Your Year-End Inventory Count

If an inventory is a big part of your business, you’ll need to do a year-end count of your physical inventory. While a physical inventory count can be a highly manual and time-consuming process, external audits usually require it. It can also provide insights into improving your operations and internal controls.

Planning ahead can minimize disruptions and help the count go smoothly. For example, before counting starts, consider disposing of obsolete items in your inventory. You can also prepare prenumbered tags to identify the part number and location, with space for adding the quantity and the person performing the count.

If you have an external auditor, they might need to be present during the physical inventory count, so coordinate the timing of the count with your audit team.

Review Fixed Assets

Do a year-end check of your fixed assets to ensure you can account for everything on your fixed asset schedule. Ensure you’ve accounted for all purchases and dispositions that occurred during the year and identify any fixed assets that are no longer in use and should be removed.

Wrapping Up Your Recs

This one might be simple, but please ensure that all transactions are recorded for the year. You may need to search for misplaced invoices or follow up with vendors to track down recurring invoices. Fun stuff.

Next, ensure your trial balance is in balance and complete reconciliations for all balance sheet accounts — not just your bank statements and credit card statements.

Reconciliations are one of the most essential steps in the closing process because they ensure the integrity of the company’s financial statements and help prepare for a smooth audit. If you find any reconciliation discrepancies, you have time to make adjustments before you officially lock down the previous year and issue financial statements.

Post-Year-End Adjusting Journal Entries

Sometimes, accounting teams may need to make several year-end adjustments. Some examples include:

• Accruing wages, utilities, taxes, and other expenses
• Accruing revenue that has been earned but not billed
• Recognizing depreciation and amortization on fixed assets
• Adjusting prepaid expenses and deferred revenue accounts based on their year-end reconciliations
• Reclassifying a portion of your long-term debt to short-term debt

Review the Numbers

Once you’ve booked all transactions, reconciled all accounts, and booked the necessary journal entries, perform an analytical review of the year-end financial statements. The Controller or CFO should review the balance sheet, income statement, and statement of cash flows and compare them to the previous year to see if anything looks strange.

This process may identify some errors or additional adjustments that need to occur. For example, if your accounts receivable is high compared to last year, you may need to write off some uncollectible accounts. Or significant variations in a particular expense account could indicate that a transaction was coded wrong.

Lock the Prior Year Down

Once you’ve made the necessary adjustments, lock down the previous year’s numbers. Doing so ensures that nobody can inadvertently change the prior year’s financial records. 

Don’t worry — if you legitimately need to process a transaction in a prior year, it is possible. You may just need to enter a password or change a setting. But locking down your numbers prevents unauthorized changes and eliminates the long, tedious process of finding errors once someone makes an entry in the wrong period.

Get a PBC List From Your Auditors

Reach out to your audit team for their PBC (provided by client) list. These are supporting documents the audit team needs from you. Get the list early, and you’ll have more time to assemble the documents they need.

If you’ve followed the best practices outlined above, reconciled all accounts, posted all journal entries, and performed an analytical review of your final numbers, you’ll have a solid paper trail and accurate numbers. You’ll be in great shape as you head into your year-end audit.

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.