Closing the Books: Key Steps in Year-End Accounting For SMEs

8 min read

February 21st, 2024

For many small and medium-sized enterprises (SMEs), the end of the fiscal year coincides with the end of the calendar year. This means it is time for financial leaders to begin closing the financial books.

In this context, "the financial books" refer to the business's income, expense, and revenue records and reports. The process of closing the books includes completing, checking, and finalizing these records before zeroing out the income and expense accounts and adding the net profit (or subtracting the net loss) on the balance sheet. By closing out your financials at the end of the year, you can objectively evaluate performance and financial health, strategize for the upcoming year, and begin creating a new budget. 

To learn how SMEs can effectively manage year-end accounting and close the books, follow this simple checklist of SME accounting steps for year-end.

8 Essential Steps to Closing the Books for SMEs at Year-End

1. Gather Financial Statements, Receipts, Invoices, and Records

To close the books, you'll need all of the year's financial data. So, you should gather all of the following:

• Bank statements
• Credit card statements
• Loan account statements
• Inventory reports
• Payroll reports
• Last year's tax return

If you have any additional financial records, be sure to gather them as well. Look through your documents to be sure you aren't missing anything. 

2. Address Outstanding Items

To address outstanding items, you'll need to begin collecting on unpaid invoices. This can be tricky because you can't control when (or if) your customers will pay. However, it's important to keep track of your efforts. Make phone calls and send out reminders. Organize outstanding invoices in terms of which are most and least likely to be paid before the end of the year. 

Read More: The Pros and Cons of Outsourced Accounting Services for Businesses

You should also be gathering receipts, invoices, and reimbursement requests from your employees to ensure that all internal outstanding items are settled in the proper fiscal year. Set specific deadlines for when you need employees to submit these documents and make sure you communicate the deadlines and process for submission clearly and thoroughly. 

3. Review Assets

You need to be sure your asset accounts are current and accurately reflect the year's activities. Review your asset expenses and additions to the accounts. Plus, make note of any losses or impairments and adjust balances as appropriate. 

During this step, you can update transactions in cash accounts and reconcile these balances. 

4. Reconcile Transactions and Accounts

When reconciling transactions, you will be checking a number of things to ensure proper recording:

• Accuracy - make sure proper amounts and dates are recorded and that each transaction has only been recorded once. 
• Errors - Look for any discrepancies and resolve the errors. 
• Consistency - All of your listed transactions should be accurately reflected on statements, receipts, and invoices and your balances should match. 
• Categorization and Classification - Be sure that your expenses and revenue are properly categorized and classified in your accounting system. 

This step in the process can be tedious because you have to look through minute details while paying exceptional attention to detail. Despite the tedium, it is important that you complete this step carefully. Errors in your transaction records can be significant, lead to major discrepancies in your financial statements, and result in compliance and tax issues. 

5. Close Out Accounts Receivable and Accounts Payable

You've already begun the process of collecting outstanding payments. When you near the end of the financial close process, you should close out accounts receivable and payable. Do your best to resolve any payments that remain outstanding before making a list of clients with outstanding payments (including interest and fees) owed to you. Contact these clients again, and then write off any debt (record as a loss) that is unlikely to be paid. \

6. Accrue Accounts Receivable and Payable

Any business following the generally accepted accounting principles (GAAP) will be operating with the accrual accounting method, and they must accrue their accounts payable and receivable before closing the year's books. (Businesses that use cash accounting can disregard this step.) 

The accrual accounting method requires that expenses be recognized and recorded when they are incurred (not when they are paid), and revenue be recognized and recorded when it is earned (not when it is received). 

To accrue expenses and revenue before closing the books, add your incurred payables to your balance sheet and add your earned receivables to your income statement. 

7. Enter Closing Entries

To close your books at the end of the year, you need to zero out your revenue and expense accounts. Depending on the accounting software you use, this can be referred to in different ways, but typically, you'll need to create closing journal entries. The profit or loss from the year can then be properly reflected in your retained earnings account. 

8. Generate Financial Reports

Once your books are complete, generate your financial reports. The standard financial statements you should pull include:

• Income statement
• Balance sheet
• Statement of cash flow

Look over the figures on these statements to ensure they are accurate. If you see any major discrepancies, unexplained changed (compared to the previous financial period), or anything unexpected, go back to your records and double check your data. 

Best Practices for SME Year-End Accounting

Start the Process Early

Since part of closing the books includes collecting outstanding payments, you should begin the process early so that you can start the collections process early. Plus, your records will be more accurate and complete if you aren't trying to rush at the last minute to take care of your financial records. 

Close Regularly Throughout the Year

It's best for businesses to get into a routine of regularly closing the books throughout the year. Most businesses do this on a monthly or quarterly basis. This routine close makes the year-end close go much more smoothly. Routine closing also makes year-end way less work because you will have been updating and correcting your records regularly throughout the year, which means you won't have 12 months of transaction history and receipts to sort through.

Read More: Financial Reports vs. Management Reports: What’s the Difference?

Additionally, routinely closing the books helps business leaders stay on top of their financial health by providing up-to-date, accurate financial reports regularly. So, you will always have reliable data for making leadership decisions on behalf of your company. 

Automate Processes With Accounting Software

When dealing with manual processes and human-driven data entry, closing the books takes a lot more time. Plus, you wind up with a lot of errors.

Robust accounting software, such as Sage Intacct or even QuickBooks, integrates with a long list of business management applications that can be used to automate data collection and transaction recording processes. Bookkeeping and accounting software will save you time, increase efficiency, and generate more accurate financial records. 

Consider an Outsourced Back Office

For a business's back office to run smoothly while minimizing opportunities for fraud, it must consist of at least a three-person team (bookkeeper, accountant, and controller). However, hiring, onboarding, retaining, and managing three bookkeeping and accounting professionals is a costly endeavor. For a fraction of the price, SMEs can outsource their bookkeeping and accounting departments to a highly experienced team. With outsourcing, businesses can have a team at their disposal while also benefiting from tried and true systems and software recommendations. 

Simplify Closing the Books: Outsourced Accounting for SMEs

Year-end accounting for SMEs doesn't have to be stressful. With a well-appointed accounting system, automated processes, real-time reporting, and expert assistance, you can close out the books for the year with, basically, the click of a button. The most cost-effective back-office strategy for small and medium-sized enterprises is outsourcing. 

An outsourced bookkeeping and accounting team can help you establish sound, high-functioning accounting systems and processes that leverage some of the most advanced technology to help you handle year-end close in a snap in addition to improving your financial management and strategy, operational efficiency, productivity, and profits throughout the year. 

When choosing an outsourced accounting provider, look for a firm with direct experience in your industry and a track record of successfully working with businesses like yours.