Closing at Year End

1
Closing at Year End

• United Kingdom

2
Procedures for Year End
The trial balance is extracted from the ledger
accounts by obtaining a balance for each
account. If the balances do not give a balance
then the difference is placed in a suspense
account. The cause of any such difference must be
investigated and corrections made before
proceeding. Once the trial balance balances the
next step is to proceed to make any necessary
adjustments.
3
Adjustments

• Accruals
• Prepayments
• Bad Debts
• Provision for Doubtful Debtors
• Depreciation
• Closing Stock

4
Accruals
Any invoices received after the trial balance has
been obtained which relate to the previous period
should be included in the accounts. Where there
is no invoice, but the sum involved is
substantial then it should be fairly estimated
and included. Matching expenditure to the
relevant accounting period is an example of the
accruals concept. The appropriate expense or
purchases account is debited and the accruals
account is credited.
5
Prepayments
Income should also be matched to the correct
financial period, the process of making this
adjustment is one of calculating prepayments. For
example, if the financial year ended on December
31st and premises insurance for 12 months was
paid of September 1st 4 months of premises
insurance have been used, but the remainder of
the payment relates to premises insurance for the
forthcoming period. This amount is calculated and
entered as a prepayment. The entry must be to
debit the prepayment account and to credit the
appropriate expense or other account.
6
Bad debts
At the end of any year it is likely that there
will be a number of debtors from whom it is
unlikely that revenue will be recovered from.
This may be because they have gone out of
business or because all means of trying to
recover the money have failed. The procedure is
to credit the debtors account (accounts
receivable) and to debit the bad debt expense
account. If the bad debt is older than 6 months
from the date that the invoice was due to be paid
then the VAT can also be recovered. Should the
debt later be recovered then a further entry is
made to the accounts.
7
Provision for doubtful debtors
Where it is determined that a number of debtors
will become bad (i.e. will not be recovered)
then a provision is made in the accounts for
doubtful debtors. This provision usually
represents a percentage of total debtors after
writing off any bad debts. Since the total of the
debtors will vary from year to year then the he
provision.adjustment will be made each year. The
adjustment takes into account the change in the
total of t
8
Depreciation
The provision for depreciation is calculated each
year for nearly all fixed assets. The provision
is recorded as a credit in the Accumulated
Depreciation Account (a balance sheet account)
and as a debit in the Depreciation Expense
Account (an expense account). The method by which
depreciation is calculated for each asset is
determined when the asset is first purchased.
Under normal circumstances this method of
depreciation should not change.
9
Closing Stock
Adjustments are made to determine the valuation
of the closing stock. The method for doing this
will usually be by a physical stock take and then
using FIFO or AVCO. For some businesses a
determination is made of the work in hand. This
is considered in a similar way to closing
stock. Both closing stock and work in hand appear
as assets on the balance sheet.
10
Partnerships
Once the net profit has been determined then the
closing procedure to set out the financial
statements will involve Setting out the current
accounts for each partner Setting out the capital
accounts for each partner This must be done in
accordance with the partnership agreement.
Companies
Calculation of taxes is carried out. Any
dividends to be declared are determined.