Closure of the accounting year: "clean slate" and a clean slate

31 December is not only a holiday, but also a special date for all accountants: the end of the accounting year!

With the end of the financial year, the new year begins. The calendar restarts and we start "from scratch". But be careful! It's not all partying, you have to be prepared for forms 303, 200, 347 and so many more.

Closing the accounting year is no easy task. Many details have to be taken into account and numerous formalities have to be carried out in order to obtain a true picture of the company's financial situation: accounting entries, annual accounts, delivery deadlines, among others.

Let's see what else we need in addition to the 12 grapes on New Year's Eve to end the year on a good note 👇.

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Closing the accounting year

What is year-end closing in accounting?

Before talking about the accounting year-end, it is necessary to clarify what the accounting year is.

The accounting period is the period of time not exceeding 12 months that reflects the financial life of a company. It coincides with the calendar year, i.e. it runs from 1 January to 31 December, with the exception of the year of incorporation and the year of dissolution of the company.

However, the closing of the accounting year refers to the process through which, as its name suggests, the closing of the accounting cycle is carried out.

This procedure or tool is carried out following a series of processes and exhaustive reviews of different accounting entries, which we will see later on. Likewise, the closing of the financial year resets the accounts and allows the next year to start "from scratch".

What is the purpose of the accounting close?

The year-end closing serves several functions:

• To reflect the actual financial state of the company, as it shows whether there has been a profit or loss during the financial year.
• To know whether errors have been made in the accounting entries.
• To help in making the right decisions for the next cycle.

What are the closing operations?

In general terms, the accounting closure consists of:

• Regularising the income and expenditure accounts;
• regularising the equity accounts;
• closing all accounts so that the balance is zero.

To achieve this, the General Chart of Accounts establishes the following steps to be followed, as well as the accounting entries corresponding to each transaction according to the classification of the groups of accounts:

1. Review of journal entry

In order to corroborate whether there have been errors in any of the entries (either by omission, repetition, entry or reversal), both the journal and the general ledger of each accountare reviewed.

2. Cash count and cash reconciliation

Once again, in order to check that payments and receipts are correctly accounted for, a countis made of the movements made during the year.

3. Inventory of stocks

Stocks form part of the company's current assets and vary throughout the year. In this respect, and in order to know the state of the assets, an accounting treatment of stocks is carried out. In other words, unconsumed stocks must be subtracted from purchases made.

4. Depreciation of fixed assets

The accounting and classification of tangible and intangible fixed assets to be depreciated is verified, as well as their life cycle and final value.

5. Reclassification of debt

All outstanding debts for the following year, as well as receivables, shall be reclassified as short-term debts (or receivables).

6. Provisions for bad debts

Corresponds to receivables that appear to be uncollectible. This amount should be recorded as an "impairment charge", which generates a provision for bad debts.

7. Accrual adjustments

Accruals and deferrals refer to the allocation of rights and obligations to the year to which they relate (as established by the accrual accounting principle). Thus, an actual distribution of income and expenses is made for one year but spanning several years.

8. Provisions for risks and charges

An item is set aside to cover possible future expenses of unknown date and amount. It is therefore a kind of insurance against unforeseen expenses.

9. Valuation of financial assets

This corresponds to the accounting of the valuation adjustment of financial assets in the available-for-sale category.

10. Closing entry

Finally, the closing entry has to be made. This shall be made in the journal and indicates the end of the financial year.

❌ After it has been made, no further transactions shall be recorded.

Annual accounting close → dates

The General Chart of Accounts establishes the following deadlines for the submission of year-end accounts:

• From 01/01 to 31/12 - Accounting year.
  • Before the start of the activity: pre-legalisation of books.
  • During the financial year: accounting of transactions, trial balance.

• 31/12
  • Drawing up the inventory

• 31/03
  • Preparation of annual accounts.
  • Management report and allocation of profits.
  • Consolidated accounts and management report.
    • 30/04
      • Closing of the accounts.
      • Legalisation of the journal
      • Trial balance
      • Annual accounts
      • Profit and loss statement
      • Annual report

• 25/07 - Before the Mercantile Register:
  • Certification of the General Meeting, approval of the annual accounts and application of results.
  • Annual accounts.
  • Directors' report
  • Auditors' report

• 14/08
  • Approval, BORME (Official Bulletin of the Mercantile Register)

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Closing of the fiscal year

Once all the aforementioned adjustments have been made, the company's fiscal year-end is closed. In other words, the following is submitted:

• Form 390 relating to the annual VAT settlement.
• The depreciation of assets
• Corporate taxes.

All these procedures are tools that help you to have a clear view of the financial state of your company and, in this sense, allow you to make the right decisions at the right time.

An accounting software has accounting reports that help to make both the accounting and the fiscal closing of your company easier.