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Year End Accounting Checklist

Published on

December 17, 2020

By

by

Michelle Taylor

Successfully Closing Your Accounting System

It's that time of year. Your accounting staff know to block their calendars all month. Partly for standard Holiday obligations, yet mostly for one of the most crucial operations in a business; Year End. For most of you reading this, you've been through this many times and we won't be telling an immense amount that you don't already know. Although, we believe we have the most efficient, accounting software agnostic, process flow for closing out your year. For a few lucky readers, this may be your first Year End closing.

Note that while we have years of experience as CPAs, business owners, accountants, and accounting process and systems consultants, this process is not a step by step guide and is certainly not exhaustive for all businesses. Please reach out to your team (internal leadership or external partners) for your organization's specific process needs.

Some steps are not consecutive, and in our experience, here is the best flow of the checklist. We will list the steps immediately below and provide more details in the following pages.

1. Inventory Counts

2. Reconcile subledgers

3. Review Chart of Accounts

4. Post all 2020 Activity

5. Reconcile General Ledger

6. Backup System

7. New Fiscal Year/Open 2021 Periods

8. Review Retention Settings

9. Print Year End and Control Reports

10. Close modules

1. Inventory Counts

To close your year effectively, you need an accurate and current inventory count. A lot of folks do not count their inventory at year end, and that’s okay. As long as they are counting in cycles throughout the year. Regardless of how often you count, it is best to have a definitive ending inventory to close out your year. In addition to operational accuracy, we need to count inventory for several reasons.

If inventory counts are not part of your process, at least review any items with negative quantities, to determine the root and enter the needed transaction(s) to correct.

Required for Tax purposes. Your ending inventory is used to determine your total profits for tax calculations. Not having this documented correctly in your system flowing from inventory to your GL can open you up to risk.

It can lessen the tax burden. Because most businesses are taxed on profit and not revenue, you want an accurate ending inventory to appropriately lower your taxable profit.

Necessary for shrinkage control (loss, damage, theft). Having an accurate inventory is often the foundation to understanding the other aspects of your business. If you can rely on your inventory data in a system, then you can find where you may have unexpected loss of product. From there, you can accurately diagnose the issue. Whether that is loss of product during transition between warehouse and shop floor or regular breakage in a specific part of production; having accurate inventory counts allows you and your team to quickly address shrinkage.

Accurate data. If users cannot trust the system, why is it in there? It is crucial for people to truly know what's in the system and to trust that data. You may find that a bar code system is required for efficiency, accuracy. With this in place, you remove the issue of mis-keying. Accuracy helps address and identify any weak links throughout the inventory processes. The element of warehouse management is crucial for any business that have warehouses.

2. Reconcile sub ledgers

Now that your inventory is updated, you need to reconcile activities in each of the subledgers (Inventory, Project accounting, AR, AP, Fixed Assets). Each of these subledgers will have a trial balance that ties to a specific account on the GL. Each subledger NEEDS to tie. If they don't, it is best to reconcile, and it is better to sort out any discrepancies now than later-on in the Year End process. If you do have a subledger that doesn't tie, go through everything in that subledger to understand why it doesn’t tie. We need to go to the GL and understand where that discrepancy is, why the amounts are different, and finally, correct those activities.

Don’t forget to reconcile all of the bank accounts, even those normally without activity, as you may find additional transactions that need to be recorded in multiple subledgers.

Another excellent year end step for order modules, is to review all open order, Sales Order, Purchase Order, Service Order, Field Service Requests, etc. to determine if any should be marked completed, as they will never be filled, received, processed, or otherwise. Though this is not an account function, it is great step for appropriate management to take to improve the value of data in your ERP system.

3. Review Chart of Accounts

With Sub Ledgers updated, now you want to review your CoA. Here you'll ensure that you are not missing any accounts that are needed to close out the year. After you reconcile your subledgers, you’ll want to review any miscellaneous activities that there are more of this year and decide if they truly should be in their own category. Here you may want to also break out accrued expenses; determine if those should be categorized more precisely, for better control over those accounts. You should also use this opportunity to identify any accounts you are no longer being used, perhaps disabling or inactivating them so you don’t clog reports and so you can prevent people from posting activities moving forward.

4. Post all Current Year Activity

At this point you’ll want to ensure you’ve posted all reconciliation differences and correctly tied any transactions to your new chart of accounts. This should capture and document all reconciliation processes across all active subledgers.

5. Reconcile General Ledger

With all your activities posted, you’ll want to complete your GL reconciliation before you officially close your year. First, ensure all allocations are posted. Throughout the past few steps, you may have made changes or updates to your allocations. This step ensures you have those posted timely.

Second, post year end accruals. Update your accrual schedules, if you have them for the current year and capture the changes for next year's schedules. Updating 2021 accrual schedules here saves you from going back later and gives you the benefit of having the schedule fresh on your mind.

6. Backup System

Even if you have a back-up scheduled near this time, you’ll want to create a separate back-up file at this time, to have available for quick roll-back. Once you've completed all the above transactions, you want a snapshot that is easily accessible. Creating a specific back-up file here and labelling it so you can easily find it will allow you to revert back to the step right before you close your year JUST IN CASE it is needed. It is immensely difficult to unwind a year end close vs restarting from a strategic point. As an accounting software best practice, we recommend a nightly back up (though some clients opt for even more frequent intervals). Tech is such that you can take a snapshot of a huge server every hour, even while users are in the system. For Year End, you want a specific back-up that they can access.

7. New Fiscal Year/Open 2021 Periods

With your back-up secure, next create the new fiscal year. How exactly you do this will depend on your system. Some systems require you to open the new year periods once you’ve opened the new year. In many cases this is as easy as going to the calendar, selecting Fiscal Year, typing the new year, and hitting Enter – the system fills-in the dates for the periods based on existing settings. No matter what the process is, you need to make sure you do this for all your active modules, if separately required to open the periods for each. If your system requires each period to be opened for each module, open your 2021 periods as it makes sense for your company. With each open period, there is potential for users to accidentally post to a future period.

8. Review Retention Settings

This is an often-overlooked step, yet take a moment to review! Retention Settings refer to how much history will be retained in the system. We recommend 11 years because your current year is a year in history, and this will give you 10 full years of history, plus the current. Also, it is best to have the same retention period for all modules, to aid in users’ experience. We have some clients that want history from the day they opened, so we select 99 years to be retained. While some folks only need 3 or 4 years. Determine what is the best setting for your business and modify each module for that timeframe. If you get to mid-year and want to add another year in retention, you will not be able to do so immediately. Changing retention settings at any other point only affects historical activity going forward; no data will even be restored that had previously been lost due to month- or year-end close processes. The records would have to be recreated for that additional time period. Bottom Line, no modern system suffers from a base retention of 10 years. If you are concerned about system performance, review with your internal systems team or your external partner to determine what, if any, adverse load times you may experience.

9. Print Year End and Control Reports

This is the part where you print all your Year End financial reports and additional control reports. Though you may have run control reports throughout this process, you want to run final control reports before closing modules. You will want to do this for all reports that tie from subledger to general ledger; it’s best to print subledgers to make sure they truly tie to ledger. You do this now to ensure your reports tie to ledger before you close the modules.

10. Close modules

Now, the moment you've all been waiting for - closing out your year. In (almost, just to be sure) every system you will do this module by module (or subledger by subledger, depending on your terminology). Here is the order we recommend:

1. Bill of Materials

2. Work Order /Manufacturing

3. Bar Code

4. Purchase Order

5. Sales Order

6. Inventory Management

7. Material Requirements Planning

8. Project Accounting

9. Job Cost

10. Time Card/ Time Tracking

11. Payroll

12. Accounts Receivable

13. Accounts Payable

14. Banking / Cash Management

15. Multi-Currency

16. Fixed Assets

17. General Ledger

You close them in this order specifically so that your modules are closed starting with those farthest from the general ledger. This ensures you have one last check for any sub ledgers that need to be adjusted before you close out the GL. You close GL last, and not necessarily at the same time as the other modules, because you may have AJEs coming in that you need to address before totally completing your year. GL can be left open indefinitely, and we encourage closing it so that users don’t accidently post to it.

Summary

Year end is no small project. In most cases it will dominate at least 2 months, several staff members, and most companies have changed their business processes significantly to accommodate for this project. There is no one best way that applies to every company to do this, and our years of experience and variety of perspective on this process has given us this high-level process our own team and our clients find most effective. Note again here that this does not and should not replace your own documented processes yet enhance them. If you do not have a year-end process documented, feel free to use this as a framework as you work closely with your internal and extended teams to wrap up your year.

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