How to close the financial year: a checklist

To close the financial year, first make the books complete and correct: reconcile cash and banks, count stock, post depreciation, accruals and prepayments, and review the trial balance. Then post the closing entry, which moves the year's revenue and expenses into retained earnings, and lock the year so no back-dated entry can change it.

The checklist

1. Record every sales and purchase document dated in the year, including credit notes and returns.
2. Reconcile every bank account with its statement and count the cash in each cashbox.
3. Match customer and supplier balances with their statements; follow up or provide for balances you do not expect to collect.
4. Count the stock and post the adjustment for confirmed differences.
5. Post depreciation for the whole year and record any asset sold or scrapped.
6. Record accruals (expenses incurred but not yet invoiced) and prepayments (expenses paid for next year).
7. Post the payroll, VAT and withholding-tax balances for the last month.
8. Review the trial balance: every account should have a balance you can explain.
9. Produce the income statement and balance sheet and review them with management or your auditor.
10. Post the closing entry and lock the year.

What the closing entry does

Revenue and expense accounts measure one year only, so at year end their balances are brought to zero and the net result — profit or loss — is transferred to equity (retained earnings). Balance-sheet accounts such as cash, customers, suppliers and fixed assets are not closed; their balances carry into the new year as opening balances.

Lock the period

After the statements are approved, lock the year so nobody can post a back-dated entry that silently changes figures you have already reported or filed. If a correction is needed later, post it in the open period with a clear description.