The end of financial year process is much more efficient with the introduction of cloud technology and QuickBooks Online. There’s no more sending or receiving backups of the file, and businesses can continue to use the file in the new financial year. Here’s our six step plan to closing out the financial year using QuickBooks.
Before we begin it’s a great idea to check the balances that you are starting with are correct and haven’t been changed since the previous year. Login to your client dashboard to see any changes to previously reconciled accounts, and to check that the previous period was locked off using the Close Books feature.
There are a few reports you should run as part of your reconciliation checklist. Customising the reports, saving them all as ‘Last Financial Year’ and adding them to a group will mean that these are all ready to run next financial year.
Other reports you can add to your report set are:
You can also choose to share the reports.
From the balance sheet you need to ensure that all balances reflect the actual position of the business. The first step is to make sure all your bank accounts, credit cards and bank loans are reconciled to the bank statement as of 30th June.
This ensures the accuracy of your book work and also verifies that all transactions on your bank, credit cards, and loan accounts have been entered and match your reconciliations.
To reconcile these accounts;
Once you see the Reconcile window you will be able to select the Reconciliation History and if any changes and Auto Adjustments have been made – you will be able to tab down and commence reconciling the account.
Once selecting the Finish Now button the difference will show zero. Follow this process for ALL bank accounts and ensure ALL clearing accounts are at zero unless there is a reason for otherwise.
Notes for reconciling accounts:
Credit cards are not usually dated at month end so you will have to draw a line as of June 30 and reconcile to this balance. You may find that depending on the date of last reconciliation you will have to reconcile to June 30 and then to statement date balance.
These type accounts should be reconciled regularly as they are a liability to the business and should reflect the true and accurate balance as of June 30.
Clearing accounts should always have a zero balance at the end of financial year. Follow the reconciliation process to ensure that you have checked the clearing accounts and there is no remaining balance that needs to be allocated.
Petty cash needs to be reconciled to balance as of June 30. Ensure that all receipts have been entered into QuickBooks online and reconciled to balance of cash in the petty cash tin.
As per the clearing accounts this account also needs to be checked off at June 30. The balance in this account should only equal the amounts left un-banked as of June 30.
Suspense accounts transactions are transactions that you have put on hold until you can work out the correct account to allocate to. This needs to be at zero as of June 30.
Review Director Loans
Directors or Shareholders borrowing money from their company for private expenses can result in tax consequences. Under tax law any loans to shareholders may be automatically treated as un-franked dividend payment.
It is recommended that you review the transactions posted to the Directors Loan to ensure they have posted correctly and highlight any issues to the accountant, especially if the director’s loan is a debit.
It is a good idea to get the accountant to review this account before June 30 so that loans can be paid back by the Director or Shareholder. The accountant may be able to allocate wages to the loan account to repay the loan before June 30.
To review director loans in QuickBooks Online, display a Balance Sheet as of the financial year-end:
Locate each director loan account and click on it to produce a Transaction Report for that account.
When working with customers that have inter-entity loans check that the loans balance each other in each company file. Run a balance sheet for both companies as of June 30. One company will have a debit balance while the other company should have the same amount in a credit balance. If the amounts don’t balance you will need to drill down into each account from the balance sheet report in QuickBooks Online, going through each transaction across both accounts to work out which transactions are missing.
Accounts Receivables (Debtors)
From the customised reports you created in Step 1, run your A/R Ageing Summary Report. This report summarises the customers who owe money at the end of the year and how long they have owed it. This report is useful to determine if a customer that owed you money for a long time is a doubtful debt and could possibly be written off. Ensure the Accounts Receivable Report total equals the Aged Receivables on your Balance Sheet.
Write off bad debts
Once the debtors have been reviewed and bad debts decided, you will need to process transactions to write these invoices off and pick up the bad debt expense.
The recommended process to write of bad debts is to create an adjustment note on the customer’s account.
To create an adjustment note:
Accounts Payables (Creditors)
This report summarises the suppliers that you owe money to at year end and how long you have owed it. It also determines why you have not paid this and whether these amounts match your supplier statements. As with the A/R report, make sure your A/P Summary reconciles to your Balance Sheet Accounts Payable or Creditors.
Reconcile Foreign Currency Debtors and Creditors
If the business has multicurrency you may have foreign debtors (receivables) or creditors (payables). Make sure that the year-end balance of the accounts payable and accounts receivable in each foreign currency is valued at the correct financial year-end exchange rate. In doing so, the balance sheet, which is always in the home currency, will display the correct home currency value of each foreign currency debtor and creditor account.
QuickBooks Online creates a journal entry behind the scenes, affecting Exchange Gain or Loss in the home currency only. Again, the number of foreign monetary units (by account and by supplier or customer) in each of the foreign accounts being revalued does not change; only the value in the home currency is changed. This is achieved by making a home currency adjustment in QuickBooks Online.
Revaluation of foreign currency debtors and creditors
If you would like to revalue the debtors and creditors to reflect the exchange rates at the end of the financial year:
QuickBooks Online will also show you the exchange gain/loss based on the exchange rate you entered.
This step will create a journal entry for you for the unrealised gain/loss for these transactions for this currency as of June 30.
Note: This is a huge time saver helping you to revalue your debtors and creditors.
Write off Obsolete Stock
If the company has stock that can no longer be sold as of June 30, a simple way of dealing with this stock is to do an Inventory Quantity Adjustment;
Check the transaction has updated the accounts correctly
Repeat the process with your Profit and Loss Report and check the amount in your cost of goods is a debit.
Check Stock-take Balance against Balance Sheet Stock on Hand Balance
It is important to make sure that if inventory is being tracked, all transactions that affect the inventory asset account are purely as a result of products in transactions, not accounts. This will help ensure that the Inventory Asset account on the balance sheet on any given date will be accurately supported by a sub-ledger for each product.
To check the stock take balance to the balance sheet:
Note: You may want to run an Inventory Valuation Detailed report and export this report to Excel in order to get quantity totals for each product by selecting the Excel button. However, if the report is simple enough this may not be necessary.
Review the quantity and amount totals for each product. Compare the totals to the inventory count results (remember, the Amount total in QuickBooks Online reflects FIFO inventory costing so compare the FIFO cost of what is remaining to the stock take and the current value and test for reasonableness). Check to see if any transactions used the Inventory Asset account without a specified product are in the section labelled Not Specified.
Click on each of the transactions in this section to correct the transactions, then re-run the report to ensure that there are no Not Specified inventory transactions and that the totals match the Balance Sheet figure as well as the stock count.
Keep in mind that although the content below covers reports using the Reports Centre in QuickBooks Online, you will also want to make use of the GST tab for GST-related reports, completing the BAS, and making a payment.
Ensure that tax codes have been entered correctly
GST on Accrual Basis:
Reconcile outstanding GST to the GST paid on June BAS.
If QuickBooks Online has been used properly, you and/or your client will have used the GST Centre and its reports and functions to complete the BAS, mark it as Lodged, and recorded the related GST payment.
It is always a good idea to ensure that all transactions for the financial year are entered before completing the BAS. Often it doesn’t matter how diligent you and your client are about producing sales invoices in a timely fashion, there are times when you will receive invoices from a supplier in August with a June 29 date.
If that happens and the invoice is entered at the correct date, there will be GST amounts affecting the GST payable balance after the BAS has been lodged and the balance paid. Should this be the case, review the new GST Payable balance on the Balance Sheet as of June 30, then run a GST Exception Report which lists the transactions containing GST that have been added, modified or deleted in prior “marked as lodged” GST periods.
There are two ways to get to the GST Exception Report:
You can also access this report from the Run Reports button in the GST Centre. Compare this report to the amount in the new GST Payable balance to ensure that it accounts for all the changes to GST in this period.
You can reconcile the GST payable account in the same way you reconcile a bank or credit card account. This also can be done for any other liability account i.e. PAYG/Superannuation.
You will now have a permanent record of the transactions that affected GST payable after the lodging of BAS.
GST on Cash Basis:
Reconcile outstanding GST to the GST of Debtors and Creditors.
If the client is lodging GST on a cash basis and the rest of the accounting is reported on an accrual basis, you are able to reconcile the GST owing amount. In theory, the GST owing on a cash basis should be equal to the GST owing on an accrual basis, adjusted for the GST of the Debtors (accounts receivable), less the GST of the Creditors (accounts payable) outstanding. It is possible to compare these figures to test the GST owing on a cash basis compared to the balance sheet on accrual basis.
Compare the GST balance on the Balance Sheet as at 30 June on a cash basis and on an accrual basis by running the Balance Sheet twice for the same date and taking note of the GST payable amount:
The difference between these two figures is the amount you will want to reconcile.
Review the listing. Export to Excel if necessary, and extract the amount of the receivables (as different invoices might have different GST implications) that will relate to the GST total amount outstanding.
Next, run the Accounts Payable report as of the year-end date:
Review the report - this will give you a total for GST.
You can now check to make sure GST outstanding as of June 30 matches your balance sheet.
The formula is:
GST Accrual – Cash = GST from Debtors –GST from Creditors
When running these checks on either Accrual Basis or Cash Basis at year end, you also need to take into account the lodgments during the year to this outstanding or last quarter by running BAS.
In a spreadsheet, compare the amounts lodged at the ATO with the amounts in your QBO file. Ensure that no movements have occurred after BAS’ have been lodged. This will show up between the difference to be paid in June BAS and BAS June FY. If there are any movements this should be taken up as an adjustment in the June BAS.
Review Assets bought and sold
Review the asset register and discuss with your client the state and location of each fixed asset on the list as at the end of the financial year, including:
Generally, a Tax Accountant will create these journal entries as part of the income tax reporting.
As part of the bookkeeper’s year end process you should review all assets purchased during the year and ensure they were properly recorded for the accounts review.
Reports and Adjustments
Provide information to the client
It’s a good idea to provide the client with reports and information throughout the year, generally the end of a BAS period is a good time to share. This will address any problem areas as they come up and will enable the client to make sound decisions and rectify any issues.
Clicking on figures or transaction details can be done in any report to zoom in on the selection to provide more detail and open original transactions. When changing the settings of any report, such as the date range, select Run Report to display it using the new settings. Assume that the dates are for the year-end just being completed unless otherwise stated.
Profit & Loss
Profit & Loss YTD analysis vs. previous year YTD
Balance Sheet at Year-End
Note: This is not a report that clients typically understand, so take the time to explain the significance of certain accounts that are of particular importance. Show them their bank and credit card balances, debtors, creditors, loans, and inventory.
Summary of Outstanding Debtors
Note: If viewing the summary version of this report prompts questions, clicking on the figures in the summary report will provide details as well. Review this report with the client to ascertain if any invoices should be written off as bad debts.
Summary of Outstanding Creditors
Note: If viewing the summary version of this report prompts questions, clicking on the figures in the summary report will provide details as well. Review this report with the client to ascertain if all these outstanding bills are indeed payable.
Provide Information to the Accountant
Providing information for tax preparation is easy in QuickBooks Online. An accountant will be able to log in to QuickBooks Online Accountant once they have accepted the invitation to be an accountant user and view the data. Here are the typical reports:
A few of these reports were created at step 1. The others can be added to your reports group and exported or emailed as one report to the accountant along with a copy of your End of Year Checklist.
Enter EOY Adjustments
The accountant may wish to enter these end-of-year adjustments directly into the client’s QuickBooks Online file, or he or she may give you the finalised trial balance with the entries to record.
Although journal entries can be recorded in any of the subscription levels of QuickBooks Online, it’s best to be accessing the company via QuickBooks Online Accountant, as it features special tools that are unavailable to even the Master Admin user of a QuickBooks Online file. One such tool is the ability to tag a journal entry as adjusting by checking a box on the journal entry screen.
Start out by making a journal entry in the usual way:
There are a couple of reports which are related to Adjusting Journal Entries, they are useful for you after you enter the end-of-year entries to compare to the accounts lists.
In the Reports centre under “For my Accountant” reports select Adjusting Journal Entries to view the journal entries and Adjusted Trial Balance to view the unadjusted (pre-adjustments) trial balance, the total adjustments in adjusting journal entry form by account, and the adjusted trial balance by account.
Start or Rolling over a new Financial Year
Take a copy of the file? Not necessary!
Typically when using desktop accounting software it is simply due diligence to make a copy of the data file and store it in a properly labelled folder (such as a folder with the four-digit year indicating the year-end date being the name) when the year-end work is complete. One of the beautiful aspects of QuickBooks Online is that this is totally unnecessary! Just keep working in the same file and QuickBooks Online will maintain all the history for easy access in the future should it be necessary. The entries are always there. You may be concerned about loss of data or corruption. Again, this is a beautiful aspect of QuickBooks Online; it’s secure, it’s cloud-based, and all these typical accounting data file worries are a thing of the past.
Roll over the file to a new year? Again, not necessary!
QuickBooks Online keeps everything in the one cloud-based company file into which you sign in so you don’t need to create a new company file for each new financial year. Just have your client continue to enter transactions using the proper dates, including new dates in the next year, as if there is nothing different to consider. The only worry you might have is what if your client decides to delete or make other changes to the year-end that was just completed, or any date before then.
A simple way to prevent this is to set a closing date.
If your client is the Master Admin user of this QuickBooks Online file, that won’t stop him or her from entering the closing date password (or changing the password if they forgot it) and making changes to periods that should be left untouched except for reporting purposes. However, creating a closing date and password, along with updating the closing date as time elapses, means that if necessary, you can run an Exceptions to Closing Date report, which will show what changes anyone with the proper credentials and knowledge of the password made to these “should be closed” periods.
This is an audit trail type of report and will come in very handy if you’re be required to undo any discrepancies your client created because they didn’t understand the meaning and significance of the term “closed period.”
Notify your client that they are not to make any changes to closed periods and explain to them what that means. It helps to explain to them that if they do so, they will incur increased bookkeeping and accounting fees to undo errors they created despite the warnings.
Thank you IntuitChris. A most insightful response/article as a new business owner/manager. For provisional tax purposes I needed to establish my current FY estimated Income Statement and therefore processed FY2020 books YTD 31 August 2019 before processing the FY2019 books.
With that out of the way, I shall now process FYE2019 books, so your article will be read in-depth to ensure proper closing/opening balances are obtained. I am sure as a nubie I will often be referring to your article.
A bit "backward" I know, but the South African tax system allows for adjustments of current FY Income Statement in the Feb declaration of each tax each year.
By the way ... Intuit Community Q&A and Youtube videos have provided me with exceptional learning!