Numbers are the language of business. For this reason, making a rigorous and accurate Accounting Closing is one of the most important tasks in a company.
The term “accounting closing” describes all the financial and accounting processes that occur regularly in a business and that lead to the closing of the books of the previous month, quarter or year. To carry out the accounting closing, it is necessary to identify all the transactions, record them in a daily book, consolidate them into a general ledger, prepare an operating account and a preliminary balance sheet, reconcile debits and credits, create adjustment entries, prepare adjusted financial statements and a test balance sheet, and, finally, close the books to set the operating account (or income statement) to zero, and obtain the balance sheet accounts at the end of the period. Also, in companies that have several subsidiaries, inter-company charges must be eliminated and other adjustments made to obtain consolidated financial statements. The first reason why it is extremely important to make a good accounting close is because regulatory regulations must be complied with. The second reason is because makes it possible to determine with certainty the economic-financial “health” of companies, since management uses the resulting financial statements to generate analysis of historical trends, comparisons with previous periods and budgets, and to generate KPIs. Financial statements are also used, and sometimes required, by external stakeholders, such as investors, banks and public regulatory agencies.
When is the best time to start preparing for the closing of accounts?
It is essential to highlight the importance of society keeping the company's accounts as up to date as possible. Otherwise, bills can accumulate and, as a result, unperformed entries, which can result in a significant and undesirable mismatch at the end of the year. Doing so also helps to close the accounting year more quickly and efficiently, in addition to anticipating possible problems or mismatches in the accounts. The accounting closing allows us to analyze the company's accounts and thus know its status, determining what paths should be taken in the following months and years. It is important to note that the closing dates for the accounting period vary depending on the company and the country. Normally, it coincides with the calendar year, but there are different reasons why they may decide to close the year in a month other than December. For example, the British fiscal year has traditionally been April 6 to 5. This system dates back to the time of the Norman conquest in the 11th century, when England was ruled by William the Conqueror. At that time, it was established that the new fiscal year would begin on April 6, the feast day of St. Hugh of Lincoln. The tradition of the fiscal year beginning on April 6 continued over the centuries and is still used in the UK today. It's worth noting that the British tax year isn't unique to the United Kingdom and is also used by several other countries. In addition to aligning with the British system, this fiscal year is also suitable for agricultural economies, as it coincides with the end of the winter planting season and the beginning of the harvest season, making it easier for farmers to plan their finances and tax obligations.
For those companies whose accounting year coincides with the calendar year, early November is usually a good time to start planning for the company's closing of accounts. This is because at those dates there is still time to review all the items thoroughly, reclassify or make the appropriate adjustments, and eventually an effort can still be made to increase sales and/or accelerate expenses and investments to influence the period to be closed. Once the accounting has been closed, the company will have six months to submit the accounts to the Treasury. Now that we have a clearer idea of what the closing of accounts is for, why some companies make it the same as the calendar year and others don't, and why it's so important, below we will explain the most relevant details to do it correctly.
Step by step to make a good accounting close
First of all, we must carry out the checking balance of sums and balances. This involves verifying that the data that appears in the company's accounts match the company's Books (the operating account and the balance sheet). In this case, it should be checked that there are no errors in the following accounts or groups of the General Accounting Plan (the following are the ones that usually cause the most problems):
- Non-current asset
- Stocks
- Creditors and debtors for business transactions
- Financial accounts
- Purchases and expenses
- Sales and revenue
- Expenses attributed to net worth
- Income attributed to net worth
Subsequently, the following tasks must be performed:
- Stock counting — In order to close the financial year correctly, all those unconsumed stocks must be considered. To verify that there are no errors, the unconsumed stocks will be subtracted from the purchases made throughout the year, and this figure must match the number of stocks in the balance sheet. For example, it is very common for companies to own raw materials or finished products in transit, and it is very important to consider when the merchandise ceases to belong to the company and becomes the final consumer, to stop accounting for it in the balance sheet.
- Periodification adjustments — This section should take into account all the expenses or revenues that have to be anticipated for the next financial year (for example, commercial expenses for sales in the next financial year or revenues related to services that will be provided in the next year). From here, the first closing adjustment will be made. In technology startups, especially those with SaaS models, care must be taken in how fees (monthly, quarterly or annual) are counted, since, in the case of quarterly or annual installments, part of the revenues must be counted as periods.
- Reclassification of debts and credits — All outstanding debts and credits for the accounting year must be considered. Once these payments/collections are located, the second closing adjustment will be made. It is important that start-up companies, which normally need a large amount of external investment, carefully review this item to show the best possible image.
- Regularization of a company's income and expenses — In this case, the accounts of group 6 and 7 of losses and profits will be balanced (the difference will be made between both groups). In addition, the difference between group 8 and 9 net worth adjustment accounts will also be made.
- Regularization of amortizations and tangible and intangible fixed assets — This step is very important, since all items related to amortizations, both tangible and intangible assets, must be amortized and accounted for correctly. It is important to be clear about the amortization rates and whether any of the assets should be subject to depreciation. This adjustment is particularly important in technological startups, since they may be subject to significant capital investments, both at the level of intangible assets, through the hiring of R&D personnel, and in tangible fixed assets, if the product they sell has a hardware component, or if large machinery is needed to produce the material goods they sell.
Once all of the above steps have been taken, the company will be ready to close the accounting books and begin analyzing the company's final accounts. One of the most important checks that startups that are thinking of applying for public funding must carry out is the relationship between own funds and accumulated losses. Some public bodies, such as CDTI, apply European Union regulations that establish that in order to be bankable, a company cannot have closed the previous financial year in what is called a crisis situation, as defined in Regulation (EU) No. 651/2014 of the Commission, of 17 June. To summarize, it can be said that a 'company in crisis' is one, other than an SME less than three years old, whose balance sheet more than 50% of its subscribed share capital has disappeared as a result of accumulated losses.
If in the preliminary closing it is detected that the company meets this definition, that is, it is a 'company in crisis', it is necessary to analyze the balance sheet in great detail and see if certain activations were pending that would reduce losses, among other possible accounting entries that would allow the company to be removed from this situation.
Do you need help to make a good accounting close for your company?
From Intelectium we offer a free account assessment to companies so that they can improve the year-end photo and thus be able to qualify for the maximum amount of aid available and/or strengthen the search for private or bank financing in order to grow. In addition, Intelectium offers services of agency specialized in startups and External CFO services. You can contact us at comunicacion@intelectium.com to request more information without any commitment.
