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The closing month of accounting is an integral part of a business. This is simply because it enables business owners to know their financial position at the end of the year.
Businesses require a proper accounting year’s closing month to know their financial state at the end of the year. Little wonder, people rave about it in the business world.
Journey with us as we take you through all you need to know about the closing month of the accounting year, definition, and how to choose for your business.
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What is Closing Month Of Accounting Year?
The closing month of the accounting year is the last month of the accounting year or tax year“. However, an accounting or tax year is usually 12 months long. It can be based on a calendar year or a fiscal year. A calendar year comprises 12 months, that end on December 31.
Month-End Close Checklist
The following checklist covers most of the tasks that must be completed before the books can be closed, regardless of the accounting system you use.
Run Review Reports
- Budget vs. Actual or P&L Variance
- Investigate any unusual changes.
Perform All Reconciliations
- Reconcile the sub-ledger with the General Ledger.
- Reconcile all bank statements of account, weekly or even daily reconciliation may make it easier to manage high-volume accounts.
- Also reconcile prepaid, Fixed Assets, work in Progress, and any Deferred Revenue accounts.
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Close Sub-ledgers, If Any
Check for any draft transactions, recurring transactions that have failed, and transactions that are still awaiting approval.
Confirm All Transactions For the Period
- Check that all accounts payable bills, including recurring bills, are in the system.
- Check to see if all expense reports are in order and correct.
Post Closing Entries in the General Journal
- Examine revenue recognition from schedules and post it.
- Post all deferrals, accruals, and reversals.
Choosing a Date for your Accounting Year End
As a business owner, you have total control over the date of your accounting year-end, but there are many factors to consider.
However, the date you select will affect you when you pay taxes on your profits. While aligning your accounting date with the tax year may seem like the simplest option, there are implications for a growing business that you should think about.
- Incorporated companies
- Unincorporated companies
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Incorporated Companies Closing Month of Accounting Year
For incorporated companies, the accounting date determines the tax payment date. Hence, the company should have enough cash on hand to pay the tax bill when it is due.
Unincorporated Companies Closing Month Of Accounting Year
Profits for a tax year are determined for unincorporated companies at the accounting date in that tax year.
Other Factors to Consider In Closing Month Of Accounting Year
- The earlier you choose your accounting year-end in the tax year, the longer you will have to pay tax on your profits.
- Although having an earlier year-end has a cash flow benefit, which accounts for higher liability when the business closes.
- The simplest way to apply the current year basis of assessment is to use an accounting year-end of 5 April or 31 March.
Steps in Closing Month of Accounting Year
Ensure to close the following:
- Revenue accounts to income summary
- Expense account to income summary
- Close income summary to keep earning
- Close dividends account to keep earning
Revenue Accounts to Income Summary
The Income Summary account is a temporary account that is used during the closing process. Hence, ensure to transfer all revenue account balances to the income summary.
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Expense Account to Income Summary
After closing expenses to Income Summary, the balance in that account represents net income for the period.
Close Income Summary to keep Earnings
Since Income Summary is a temporary account, the balance must be transferred to keep earnings in order to track the company’s cumulative earnings.
Close dividends to Retained Earnings
Close cash distributions or dividends paid to owners during the period to keep earnings so that the balance reflects the earnings that the company keeps for future needs.
Further Tips To Ensure A Smooth Close
Finance teams must perform certain common tasks diligently throughout the year. So make sure you have solid procedures in place for the following.
- A clear procurement process
- Smooth travel expenses
- Integrated accounting system
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A Clear Procurement Process
You must have complete control over purchasing and procurement. However, you should be able to check any important transaction at the end of the month or year to see the purchase order, approval, fulfillment, and delivery. If possible, try to automate this process.
Smooth Travel Expenses
At the end of the year, employee expense claims can add hours or days of work. However, it is critical that you can collect claims and receipts and then process reimbursements smoothly.
Integrated Accounting System
With today’s technology, there’s no reason to enter so much data. However, your accounting systems should be in such a way that you are never copying and pasting data from one to the next.
What is a Company’s Fiscal Year?
The fiscal year of a business is the same as the financial year; it is any 12-month period that the business uses for accounting. The year’s end date defines the fiscal year. The end of any quarter, such as March 31, June 30, September 30, or December 31, is usually the fiscal year’s end.
Every company has its own fiscal year. o, if you run a seasonal business with highs and lows in sales and activity, make your fiscal year the end of the quarter after the activity is over. This makes it easier to see how your company performed throughout the year.
Businesses usually consider two criteria for setting a fiscal year-end:
- Type of Business
- Business cycle
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Type of Business
To match the personal tax year-end, a sole proprietorship or a business that is taxed as a sole proprietorship (such as a single-member LLC) must have a fiscal year-end of December 31.
Business Cycle
If your business is not taxed as a sole proprietorship, you can end your fiscal year during the year. However, most businesses choose their fiscal year-end based on their industry’s business cycle, choosing the end of the busiest season.
Example
As an example, companies that conduct most of their business during the summer may opt for a September 30 year-end.
If your company does a lot of business with the federal government, you might have your fiscal year-end on September 30 to coincide with the federal government’s fiscal year-end.
So, if your company sells most of its products during the holidays, December 31 might be a good choice.
Importance of Closing Month Of Accounting Year
The close process serves a few important functions at month-end and year-end. These procedures assist you in the following ways:
- Meet legal obligation
- Create investor report
- Ensure effective financial management
Meet Legal Obligation
In most countries, businesses are required to report their final financial status once a year. In an audit, the annual close is also critical, and keeping consistent, accurate books is essential to running a business successfully.
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Create Investor Report
It is also a legal requirement for public companies to file an Annual Report for investors. In addition, investors in venture-backed companies must ensure that their money is properly used.
Ensure Effective Financial Management
Examining the company’s books regularly and correcting errors as you go lowers the risk of major problems later on. The closing process, like checking a car’s tires and wheel alignment, provides you with regular opportunities to ensure that the company is well-positioned for the future.
What is the Difference Between a Fiscal Year and a Tax Year?
You calculate your business taxes throughout the fiscal year of your company. According to the Internal Revenue Service, tax years can be either fiscal or calendar years.
It isn’t necessary for you to choose a tax year for your company; you can simply file your first income tax return for that year.
According to the IRS, you can use any of these two years as your business tax year:
- Calendar year – (365 days)
- The fiscal year of your business
Therefore, if your fiscal year comes to an end on December 31, your business is using a calendar year as the business tax year.
Conclusion
In accounting or taxation, a calendar year or a fiscal year is usually 12 consecutive months (including 52 or 53 weeks). While a calendar year comprises the 12 months that end on December 31st, a fiscal year comprises 12 consecutive months or a 52-53 week year that ends on the last day of any month other than December.
In addition, the fiscal year is mostly used for taxation. Some businesses file their taxes on a fiscal year basis rather than a calendar year basis. The date for your accounting year-end is entirely up to you as a business owner, but there are many factors to consider.
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Frequently Asked Questions on the Closing month of the Accounting year
What is the financial year’s end?
The closing off of a company’s accounts for the business year is known as financial year-end (also known as fiscal year-end or FYE). It is nothing more than a company’s 12-month (annual) accounting period, which is used to assess the annual profit, loss, and financial performance of the company.
What is a 12-month accounting period called?
It is a period used by the government and businesses for accounting to plan annual financial statements.
What is the closing month of the accounting year?
The closing month of the accounting year is the last month of the accounting year or tax year. An accounting or tax year is usually 12 consecutive months, based on either a calendar year or a fiscal year (including 52 or 53 weeks). A calendar year is 12 consecutive months, ending on December 31.
How do you end a financial year?
- Prepare a closing schedule.
- Gather outstanding invoices & receipts.
- Review asset accounts.
- Reconcile all transactions.
- Close out accounts receivable and payable. …
- Accrue accounts receivable.
- Accrue accounts payable.
- Adjust grants and entitlements.
How do you choose the closing month of an accounting year for an estate?
The estate calendar year begins on the day the estate owner dies and ends on December 31 of the same year. The executor can elect a fiscal year, so the tax year ends on the last day of the month preceding the one-year anniversary of death.
What is the importance of the closing month of the accounting year?
- Meet legal Obligation
- Create Investor report
- Ensure effective financial management
What is financial year end?
The closing off of a company’s accounts for the business year is known as financial year-end (also known as fiscal year-end or FYE). It is nothing more than a company’s 12-month (annual) accounting period, which is used to assess the annual profit, loss, and financial performance of the company.
What is 12-month accounting period called?
It is a period used by the government and businesses for accounting to plan annual financial statements.
What is closing month of accounting year?
The closing month of the accounting year is the last month of the accounting year or tax year. An accounting or tax year is usually 12 consecutive months, based on either a calendar year or a fiscal year (including 52 or 53 weeks). A calendar year is 12 consecutive months, ending on December 31.
How do you end a financial year?
- Prepare a closing schedule.
- Gather outstanding invoices & receipts.
- Review asset accounts.
- Reconcile all transactions.
- Close out accounts receivable and payable. …
- Accrue accounts receivable.
- Accrue accounts payable.
- Adjust grants and entitlements.
How do you choose the closing month of an accounting year for an estate?
The estate calendar year begins on the day the estate owner dies and ends on December 31 of the same year. The executor can elect a fiscal year, so the tax year ends on the last day of the month preceding the one-year anniversary of death.
What are the importance of closing month of accounting year?
- Meet legal Obligation
- Create Investor report
- Ensure effective financial management
References
- cementanswers.com – Definition of the Closing Month of Accounting Year
- quora.com – Accounting Year End for an estate
- thebalancesmb.com – Determination of Company’s Fiscal Year
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