At the end of every accounting period, businesses gather information about their income and expenses and record them in a standard set of financial reports. These documents account for everything from inventory expenses to loan repayments to paid-out taxes, employee benefits, and wages. Once organized and verified, these key reports paint a solid picture of your business’s financial health.
While such reports are essential all year round, they never matter more than at the end of the year. That’s because a twelve-month snapshot of your business’s finances informs just about every decision your organization makes, from how much inventory to order to whether to hire new employees to when operations might be ready to scale.
In this article, we’ll discuss preparing year-end financial statements for your business.
What are year-end financial statements?
Businesses generally rely on a mix of four standard statements to better understand their finances at the end of the year. These are:
- Balance sheets
- Cash flow statements
- Income statements
- Owners’ equity statements
While the most organized businesses can pull these statements together at any time with a click of a button, they are considered most accurate after the close of fixed accounting periods once all books are reconciled. This is especially true at the end of the year when a business can step back and review whether they’ve operated profitably.
In general, the most essential year-end financial statement is the year-end income statement. This report offers insights into a business’s revenue, expenses, and tax payments then assigns a dollar amount to a business’s net income or net loss. Analysts, investors, and lenders can also use this document to predict an organization’s future viability.
How to prepare year-end financial statements
Usually, businesses lean on an accountant to help them prepare year-end financial statements. Whether your business employs an entire accounting department, contracts with a part-time accountant, or uses accounting software to handle its financials, understanding how to prepare these documents can help you better understand your organization’s finances.
1. Ensure you’ve received all invoices for the year
A few weeks before your business’s final accounting period of the year, contact your suppliers to ensure all outstanding invoices have been issued. If you plan on placing orders in the last week or so of the year, understand that those invoices will be paid and posted to the following year.
2. Verify that you’ve invoiced all your customers
On the same note, you’ll want to confirm that every customer who’s received goods or services from your business has received an invoice. Remember that promptly invoicing your customers allows their accounting teams to close the books on their accounting year swiftly.
3. Accrue any wages you’ll pay by EOY to keep books accurate
To keep your books accurate, you’ll need to account for any wages your business will pay out before the end of the year, even if those checks are cut after the close of your accounting period. If your employees’ wages are not predictable, you may need to estimate hours and make adjustments after the fact.
4. Audit and value your inventory
If you haven’t done so already, you’ll need to conduct an end-of-year inventory count to verify that your business’s physical inventory matches the inventory accounted for on your balance sheet. While inventory and asset audits can be daunting, there are ways to minimize their strain on your business’s resources.
Stay organized, practice perpetual inventory with the help of good inventory management software, and utilize barcodes and QR codes to help you speed through physical inventory counts. If that’s not a reality this year, consider working toward automating your inventory system in the next twelve months.
Related: How to Practice Better Inventory Control This Year
5. Calculate any asset depreciation
You’ll also need to take time to determine how your business’s assets have depreciated over the last twelve months. From furniture to computers to manufacturing equipment, the value these assets have lost should be recorded and reflected on your business’s financial statements.
Remember that this depreciation will also affect your business’s tax implications for the year. The right inventory management software can help you keep track of your assets’ conditions over time, saving you time and stress during the already-busy holiday season.
6. Reconcile all bank accounts
Next, you’ll need to conduct a bank reconciliation. If you need to record any adjustments, create the required journal entries so that your records match your bank statements. If this goes beyond your small business’s ability, you can work with a contracted accountant to help you do this.
When this is done, post these bank account balances to your business’s general ledger. Review these balances carefully, and continue using journal entries to align all details.
7. Review financial statement drafts
After you reconcile your business bank accounts, comb through your year-end financial records and ensure everything looks accurate. Once you’ve identified errors and created the journal entries required to rectify them, review the documents again until you are completely satisfied they are entirely correct.
8. Accrue estimated income tax expenses
Have another look at your most recent draft of your income statement and determine your business’s income tax expenses. While this will only be an estimate, you’ll need to determine this number to finalize your business year-end financial statements.
9. Close all accounts
Now that you’re prepared to close the books on the accounting year, close all ledgers for the period. Because your business will continue to operate after this close, any new income or expenses will be accounted for in the following period.
Remember that you’ve already accounted for predicted expenses like payroll, taxes, and benefits through the end of the year.
10. Distribute finalized statements
Now that your inventory is audited, your end-of-year statements have been triple-checked, and there’s no possibility for new entries into your business’s ledgers for the year, it’s time to generate and distribute those end-of-year reports.
Whether you share these documents with investors, advisors, consultants, or parent companies or just review them independently, your accurate end-of-year financial reports can help you understand how your business performed in the past—and how to plan for an even stronger performance in the future.
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