At the end of your business financial year, which many have in December, you need to officially close your books of accounts.
It is part of the process of maintaining proper financial records and will help you put all things about your business going forward and backwards. You need to give yourself enough time to ensure you do not miss any of the following processes involved in closing your books of accounts:
1. Enter the final postings
You decide the point, or date, which will differentiate one financial year and the next. These posts are entered in your day books and your ledger records, that we believe you’ve faithfully maintained all year. It is important to do this so as not to miss out or create confusion on accruals – revenues and expenses you’ve not received or paid money for, yet.
2. Verify your postings
Before moving to the next step, you must take time to ensure all your postings are accurate. Your documentary evidence, such as receipts and invoices, will help ease your work. Your bank records are another means to verify your financial records.
3. Make necessary adjustments
This will be the follow-up to the first two steps. Adjustments not only involve correcting any errors but also balancing out what you recorded in your journal. If you’re using accrual-based accounting you must ensure all the double-records you made on each transaction add up.
4. Create a back-up
It is important that you archive all your records. You will definitely need to refer to it in future if not only to save it from getting lost. Of course, you must use a software tool to do store your financial info in a hard disk or on a cloud platform. It’s up to you to decide.
5. Prepare a trial balance
In a trial balance you post all the money ins and outs of your financial year. It’s a summary of your ledger records and the catch is that it must balance, after all every transaction is recorded twice, no? If it does not balance, you need to find the error and correct it. You can also get an accountant friend to help you review or out rightly get a consultant.
6. Prepare the financial statements
When everything is in order you can prepare the financial statements to put into context all the work you’ve been doing all year. You’ll get to know:
- whether your business has money to run
- whether your business is making profit
- whether your business has collateral for loans
But you must prepare them in the standard procedure for them to be accepted by external users such as banks and investors.
7. Prepare forecasts for next year
It’s good practice once you’ve closed out your entries to draw forecasts for the following financial year. The advantages of planning prepare you for most surprises, good or bad, that may arise in the near future. For instance, you can prepare a cash budget for how much money will be needed to run the business the following year.0