Accounting closure, a crucial step in the financial management of companies, is of capital importance.
It allows you to finalize your annual balance sheet, compile financial documents, and plan for the future
How and when should you properly close your accounts? Here’s what you need to know.
How to close your accounting year?
Closing of the accounting year, defines a mandatory formality for all companies, to be carried out once a year.
But it also has the advantage of providing you with an analytical view of the economic health of your organization.
More specifically, closing accounts involves:
- complete the recording of all your accounting entries for the period in question, necessarily extending over 12 months;
- gather the supporting documents and all the operations necessary for producing the company’s balance sheet.
Only by submitting your annual accounts can you move from one accounting year to another.
To learn more about this topic, discover in our practical guide the 6 key steps to effectively carry out your accounting closing, without a hitch.
What is the closing date?
By default, the financial year closes on December 31. However, you can choose another date depending on your activity, for example during a quieter month if you are subject to strong seasonality.
In all cases, the condition remains the same: a fiscal year must extend over 12 months, and start on a fixed date.
How does an accounting closing work? The 6 steps to follow
Step 1: Prepare All Documentation
First and foremost, make sure you have complete documentation for the current tax year.
Step 2: Reconcile Accounts
If you haven’t already done so, compare your bank account balances with the corresponding bank statements. The goal? To ensure they match.
If a discrepancy is detected, it is imperative to explain it and resolve it by looking for, for example, checks pending debit or unrecorded transactions.
Step 3: Identify and Record Adjustments
This step involves examining assets, liabilities and expenses in detail, to determine whether they require adjustments.
Accounting adjustments include:
More specifically, this documentation includes all of your supporting documents, such as your invoices. Indeed, you must be able to prove each accounting entry, each transaction, with a numbered document (don’t forget the VAT!).
- Accounting depreciation: these are periodic charges entered in the income statement with the aim of spreading the cost of a fixed asset over its expected useful life.
- Current assets and liabilities: Transitory assets and liabilities, also called current assets and liabilities, refer to balance sheet items generally intended to be converted into cash or settled within one year.
- Provisions: Provisions define amounts set aside in the company’s accounts to cover uncertain but probable future losses or expenses.
Step 4: Prepare the Financial Statements
Now it is time to use all the company’s accounting data to prepare the key financial statements, that is:
- the balance sheet,
- the income statement,
- the accounting annex.
Let’s take a closer look at each one.
The balance sheet
The balance sheet provides an overview of the company’s financial situation at a given time, generally at the end of the financial year.
It then presents the distribution:
- assets: cash, real estate, equipment, inventory, customer receivables, etc.,
- liabilities: debts, loans, accounts payable, accrued expenses, etc.,
- equity, that is, the portion of the company’s value held by shareholders.
At each closing, your balance sheet highlights revealing figures to decipher your company’s operating cycle, the associated financing, and the sustainability of the whole.
The income statement
The income statement summarizes the organization’s performance over the fiscal year.
We therefore find there:
- the income generated,
- the costs and expenses incurred to obtain this income,
- It calculates the net profit or loss from these operations.
The income statement is an excellent tool for assessing your profitability. It is therefore of interest to investors, managers, and other stakeholders affected by the financial health of the company.
Annex / Notes to the Financial Statements
In addition to the two main financial statements, the appendix offers extra details. This helps in understanding the documents better.
These include, for example:
- explanations of the accounting methods used,
- significant events occurring during the financial year,
- off-balance sheet commitments,
- details of fixed assets, grants received, provisions, etc.
The annex is therefore very important to guarantee your financial transparency as well as your tax compliance.
The financial statements (namely the balance sheet and income statement mentioned above) and the accompanying tables make up what is called the tax return.
Step 5: Validate and File the Tax Return
Once your tax return has been edited and validated internally (at the General Meeting, for example), it is time to send it to the administration within 3 months. However, you have 4 months if your financial year ends on December 31.
These elements will be used to calculate your company’s tax.
Step 6: Perform Financial Analysis
The final step, but not the least: carrying out financial analyses to better manage the company.
Indeed, at the closing of the accounts, don’t just look back. Take this opportunity to delve into the company’s figures, assess its profitability, liquidity, debt, etc., and thus establish forecasts for the coming year.
This work will guide your future financial strategy, making accounting closing a key element of your success!
How to Transfer Balances to the New Fiscal Year
After closing your accounts, you must carry forward balances, showing the balance for the previous year in the “New Accounts Journal “.
More concretely, it is about:
- debit each account showing a debit balance during the previous financial year,
- credit each account showing a credit balance from the previous financial year.
Conclusion
Whatever your profession or trade, you will most likely have to face the exercise of closing accounts.
For some, it requires the use of an accountant or an accounting firm. For others, suitable accounting software is sufficient: it avoids repetitive data entry and allows all operations to be managed without the need for a third party.