How to Prepare Year-End Accounts

This page contains our free online course on preparing year-end accounts. It covers the basics of year-end accounting and adjustments, as well as the preparation of financial statements.

The Course Covers:

The Fundamentals of Year-End Accounting

Compiling Year-End Accounts

A Period-End Checklist

Financial Year-End Essentials

Ideal for Sole Traders and Ltd Companies

Tax Calculations

Compiling a Profit and Loss Statement

Compiling a Balance Sheet

Depreciation and Other Adjustments

Accruals and Prepayments

And more

Course Modules:

Lesson 1: Year-End Introduction

Lesson 2: Bookkeeping to Trial Balance

Lesson 3: Corrections

Lesson 4: Reconciliations

Lesson 5: Depreciation

Lesson 6: Accruals and Prepayments

Lesson 7: Stock Adjustments

Lesson 8: Tax Calculation

Lesson 9: The Profit and Loss Account

Lesson 10: Compiling Financial Statements

Lesson 11: Compiling Financial Statements Cont.

Disclaimer: You must seek the advice of an accounting and tax professional before filing company accounts and tax returns. This course is extensive but is not suitable for all businesses. Please seek the advice of a tax professional.

Jump to:

An Introduction to Year-End Accounts

Bookkeeping to Trial Balance

Correcting Errors

Reconciling the Accounts

Calculating Depreciation

Calculating Accruals & Prepayments

Calculating Purchases and Closing Stock

Doing the Tax Calculation

The Profit & Loss Account and Retained Earnings

Compiling the Profit and Loss Statement

Compiling the Balance Sheet

Year-End Basics

Year-End Accounting Course: How to Prepare Financial Accounts

Step 1: An Introduction to Year-End Accounting

Module overview:

Course Introduction
What are Year-End Accounts?
Who compiles Year-End Accounts?
And more

1.1 Course Overview

This comprehensive course will teach you how to prepare year-end accounts from start to finish. It is a step-by-step guide. Combined with my other detailed bookkeeping and accounting courses, you will create a solid foundation for bookkeeping, accounting, and finance.

The course includes:

Bookkeeping to Trial Balance. The double-entry bookkeeping required to prepare accurate financial accounts, reviewing of debits and credits, and the role of accounting software.
Making Corrections. Common mistakes to look out for and how to fix them.
Reconciliations. The accounts that require reconciliation and the process for doing so.
Depreciation. Accounting for depreciation of fixed assets and the methods of depreciation.
Accruals and Prepayments. Calculating accruals and prepayments, and common accruals and prepayments.
Stock Adjustments. Creating a stock account, including opening and closing balances.
The Profit and Loss Account. Calculating the profit and loss equity account.
Retained Earnings. Calculating retained earnings for the period.
Year-End Journals. How and when to post journals, including closing journals.
Compiling a profit and loss statement (statement of comprehensive income). How to compile a profit and loss statement.
Compiling a balance sheet (statement of financial position). How to compile a balance sheet.
Tax Calculations and Returns. A brief review of what may be required from a tax perspective, and the records and calculations which should be kept.
Course Ending. Miscellaneous items.

1.2 What are year-end accounts?

Year-end accounts detail an entity's sales, expenses, profit (or loss), assets, liabilities, and equity for the financial year of an entity. They cover the period from the start of a financial year to the end.

Company year-end accounts typically cover a twelve month period, which corresponds to the company's financial year. For example, a company with the financial year of 31 March 20XY will have a financial year from 1 April 20XX to 31 March 20XY.

1.3 Why are year-end accounts needed?

Tax authorities require year-end accounts. They are the primary source of tax calculation.

Year-end accounts are also crucial for financial planning and business management and are required by lenders.

Without year-end accounts, a company cannot calculate its profitability and taxation.

1.3 Who can compile year-end accounts?

Year-end accounts are usually compiled by an accountant, tax accountant, chartered accountant, or CPA. However, they can also be compiled by a bookkeeper, business owner, or an in-house member of the accounting/finance department.

If you require an accountant, i.e., me, please email me at: info@bpfs-online.com.

Step 2: Bookkeeping to Trial Balance

Module overview:

The What, Why, and How of Bookkeeping
Record-Keeping
Double-Entry Bookkeeping
And more

2.1 The Bookkeeping

The first step is the bookkeeping, which is the most time-consuming aspect of preparing year-end accounts for most businesses.

It is advised that bookkeeping be done at least monthly. This helps keep the accounts up to date, makes record-keeping manageable, and enables the production of management accounts.

Bookkeeping involves accounting for all the business's sales, expenses, assets, liabilities, and equity. This is much easier using accounting software, such as Xero, but it can also be done using Excel or a similar program.

2.2 What is bookkeeping?

Bookkeeping is the record-keeping of an entity's financial transactions and documents. This includes recording an entity's sales, expenses, liabilities, equity, and investments, as well as asset purchases and sales.

For small entities with few transactions, recording the financial transactions on a simple Excel file, such as listing sales and expenses, will suffice. However, for larger businesses, it is recommended that a more comprehensive bookkeeping system be used, such as utilising bookkeeping software.

To learn the basics of bookkeeping, take my Free Bookkeeping Course.

2.3 What needs to be accounted for?

A complete bookkeeping record should include the accounting of the following:

All sales invoices and credit notes
All purchase invoices and credit notes
All money in and out of the business bank accounts, including current and savings accounts
All money in and out of any cash accounts (petty cash)
All money in and out of the company credit card accounts
All loan transactions, such as repayments and interest. This can include business loans and mortgages
Any business transactions showing in the owner's personal bank accounts

2.4 Should I use double-entry bookkeeping?

Is it a legal requirement? It depends on the country in which the business operates - different tax authorities have varying requirements.

Should you use double-entry bookkeeping? Yes. Double-entry is a very accurate and robust method of accounting. Accounting software will automatically do the double-entry, making the process easier. I have a link for 90% off Xero here.

To learn the basics of double-entry bookkeeping, take my Free Double-Entry Bookkeeping Course or The Ultimate Bookkeeping & Accounting Course.

2.5 Should I use accounting software?

Bookkeeping software has many advantages. It will do the double-entry bookkeeping for you. It can also speed up the bookkeeping process by automating several aspects of accounting. Accounting software also offers useful financial reports at the click of a button. However, smaller businesses may not be able to justify the cost.

The most popular software packages are Sage, QuickBooks Online, and Xero.

Having second thoughts about compiling year-end accounts or need help with your bookkeeping?

Outsource to me - a highly experienced and qualified accountant and bookkeeper: info@bpfs-online.com

SM Accounting (my accounting practice)

Step 3: Corrections

Module overview:

Common Mistakes to Look Out for
Making Corrections
Fixing Accounting Errors
And more

3.1 Review the Accounts

It's now time to start a series of corrections and adjustments.

First, you must review all account transactions, including reviewing the nominal activity on all sales, expense, asset, liability, and equity accounts. Why? We are looking for mistakes and things that need correcting. If the bookkeeping is not accurate, the year-end accounts will also be inaccurate.

Accounts often contain errors. To help you correct these, I've included a list of common accounting mistakes below.

3.2 Common Accounting Mistakes

Below is a list of common errors to look out for when preparing company accounts:

Misallocated expenses. It is common for expenses to be misallocated. Net wage payments allocated to gross wage expense and software costs assigned to subscription costs are just a few common misallocations that will need correcting.
Assets as expenses. Computer equipment, office furniture, and other assets can often be shown as expenses on the profit and loss statement rather than as additions to assets on the balance sheet. This obviously needs correcting.
Missing wages journals. The wages journals are often omitted. These will need adding. You may also find that pension, wages, and social security payments have been posted to the wrong nominal accounts. I have a Free Wages Journals Course if you need help with payroll and wages journals.
Personal transactions are showing in the accounts. Any transactions not wholly and exclusively for the business must be removed from the accounts.
Tax payments are not showing. Tax payments are often misallocated. Fines and interest on late payments are frequently omitted.
Drawings/dividends allocated as expenses. This is obviously incorrect and needs modification.
Old debts are included in the balance of trade debtors and creditors. Generating an aged debtors and creditors report can highlight old customer and supplier debts. This usually means something needs correcting or debts need to be written off.

3.3 What's the Best Way to Make Corrections?

It is best to draft and post a journal detailing all the corrections. This journal should be dated as the last day of the financial year and include detailed descriptions.

If you're using accounting software, and the mistakes are minimal, then editing transactions is an option. However, you shouldn't edit transactions that are within previous closed periods.

3.4 Need help?

I offer an Accounting Mentor Program and Accounting Support by Email to provide training and assistance.

Step 4: Reconciliations

Module overview:

Reconciling Accounts
Which Accounts to Reconcile
Using Software
And more

4.1 What is a reconciliation?

An accounting reconciliation is a process of ensuring that the transactions accounted for accurately reflect the actual transactions that have occurred.

Reconciliations help remove errors, such as duplicates, and identify missing transactions.

A reconciliation consists of reviewing the transactions and balances in the accounts against an official statement. Such as examining the banking transactions in the accounts against a bank statement.

4.2 How do you reconcile accounts?

Reconciliations are done by comparing the accounting data against a statement. They are easier with accounting software, as it usually has a reconciliation tool.

Everything should be checked when doing a reconciliation - the opening and closing balances, as well as all money inflows and outflows.

4.3 Which accounts need reconciling?

When preparing company accounts, as many accounts as possible need to be reconciled. This includes:

Checking/current and savings bank accounts
Loans and mortgages
Credit cards
Customer accounts
Supplier accounts
Tax accounts

4.4 Learn how to reconcile accounts

Take my Free Reconciliations Course to learn how to reconcile your accounts.

Reconciliations and year-end accounting are much easier with accounting software.

Click here for an exclusive and special discount on Xero.

Step 5: Depreciation

Module overview:

The What, Why, and How of Depreciation
Depreciating Assets
Depreciation Journal
And more

5.1 Depreciation Basics

Most tangible assets will need to be depreciated over time. Common depreciated assets are computers and office equipment, machinery, furniture and fixtures, and motor vehicles. Stock and property are generally not subject to depreciation.

Depreciation is done to ensure that the value of assets stated in the accounts matches the actual value of the assets. If no depreciation is accounted for, the assets will always be shown in the accounts at their cost price. Depreciation lowers an asset's value. It accounts for the wear and tear of assets.

There are two methods of depreciation: the straight-line method and the reducing balance method.

The method used depends on which has been used historically.

You can learn the basics of these methods and depreciation in my free depreciation course.

5.2 Depreciation Journal

Depreciation is posted on the balance sheet and the profit and loss statement.

Assets should be categorised and depreciated as a group. Typical asset groups are:

Computer and office equipment
Fixtures and fittings
Tools and equipment
Motor vehicles
Plant and machinery

The depreciation journal should reduce the asset's value on the balance sheet and record the depreciation expense on the profit and loss statement. For example:

If the computer equipment has a depreciation of 500, then...

Debit depreciation expense (P&L) 500

Credit computer equipment depreciation (balance sheet) 500

5.3 Depreciation Accounts & Examples

The balance should include the following accounts:

Asset cost b/f (debit balance)

Asset accumulated depreciation (credit balance)

Asset additions for the year (debit balance)

Asset depreciation for the year (credit balance)

Asset cost b/f is the total of asset purchases made since the start of trading.

Asset accumulated depreciation refers to the total depreciation of an asset since its inception. The asset cost b/f minus the asset accumulated depreciation totals the asset opening balance for the financial year.

Asset additions for the year are the total cost of asset purchases within the financial year or reporting period.

Asset depreciation for the year. Once it has been calculated, the depreciation for the year will be posted here.

Example:

Depreciation at 25% reducing balance.

Motor vehicles at cost b/f = 87,800

Most vehicles accumulated depreciation = 21,950

So, the opening balance of the motor vehicle asset account is 65,850 (87,800 minus 21,950)

Motor vehicle additions = 35,000

The asset opening balance, plus additions, is multiplied by 25%. Or... (65,850 + 35,000)*0.25

Calculated depreciation = 25,213

The journal will be:

Debit depreciation expense 25,213 (P&L)

Credit motor vehicle depreciation 25,213 (BS)

5.4 What Next?

If the accounting software doesn't transfer the asset depreciation charge for the period to the accumulated depreciation account at the start of the next period, you may need to post a journal entry to do so. The journal will be dated as the first day of the next reporting period.

5.5 Adjustments!

This is the first of many year-end adjustments. It's advised that you keep a detailed record of all calculations before posting the adjustments using a journal.

Step 6: Accruals & Prepayments

Module overview:

Common Prepayments
Common Accruals
Journal Basics
And more

6.1 Prepayments and Accruals

Next up are prepayments and accruals. This will be another year-end adjustment posted by journal entry.

Take my free prepayments and accruals course if you need to learn prepayments and accruals, but here is a recap of the basics:

Prepayments are costs accounted for in the financial year (or period) that relate to the next financial year (or period).

Accruals are costs accounted for in the next financial year (or period) that relate to the reporting financial year (or period).

6.2 Prepayments and Accruals Journal

Prepayments are assets, so the journal entries are debit prepayments (on the balance sheet) and credit expenses (on the profit and loss statement).

Accruals are liabilities, so the journal entries are recorded as credits to accruals (balance sheet) and debits to expenses (profit and loss statement).

The journal should be dated on the last day of the reporting period.

Remember to reverse the journals dated the first day of the following financial period.

6.3 Common Prepayments

Typical prepayments include insurance, subscriptions, software, rent, and retainers.

6.4 Common Accruals

Typical accruals include lighting, heating, and power costs (gas & electric), as well as accounting fees and interest.

Step 7: Stock Adjustments

Module overview:

Opening and Closing Stock
Raw Materials, Work-in-Progress, Finished Goods
Stock Adjustment Calculation and Journal
And more

7.1 Stock

If a company has stock, such as a company that sells or manufactures products, the stock must be accurately accounted for in the financial accounts. For larger businesses, this may involve conducting a year-end stocktake for raw materials, work-in-progress (WIP), and finished goods.

Stock is accounted for at the cost price. Not sale (retail) price.

7.2 The Stock Calculation

The stock calculation has four lines:

Opening Stock

Plus Additions (purchases)

Minus Stock Used or Sold (disposed of)

Equals Closing Stock

The opening stock is the closing stock of the previous period, brought forward. For a new business with no earlier trading period, the opening stock will likely be zero.

Additions are the purchases of stock within the accounting period. This represents the total amount of stock purchased from suppliers throughout the year.

Stock used or sold is the stock no longer owned by the company but used to provide services or sold to customers within the financial period. Once the calculation is complete, the stock used or sold will show on the profit and loss statement as a cost of sale.

The closing stock is the value of the stock (at cost) at the end of the accounting period. This will show on the balance sheet as a current asset. The closing stock figure is available through a stock-take or valuation.

In summary:

Opening Stock (brought forward from previous period) + Additions (purchase of all stock from suppliers) - Stock Used or Sold (calculation below) = Closing Stock (stock-take completed at the period end)

7.3 Calculating Stock Used

You can calculate the stock used figure as long as you know the opening and closing stock figures, as well as the purchase figures, for the financial period.

Opening Stock + Purchases - Stock Used = Closing Stock

THEN

Opening Stock + Purchases - Closing Stock = Stock Used

7.4 Stock Journal

There is no a single journal that fits all, as businesses account for stock and purchases differently. However, from my experience, I usually have to do the following:

Account for the closing stock and stock used = DR Closing Stock (current asset) and CR Purchases (Cost of Sale)

Step 8: Tax Calculations

Module overview:

Calculating Tax
Capital Allowances
Disallowable Expenses
And more

8.1 Calculating Tax

Once all the previous steps are complete, it's time to calculate the tax. However, please speak with a tax professional, as your tax authority may require additional steps. I've tried to cover all the steps, but this course is not tailored to a specific business or country.

The tax calculation is not as simple as multiplying the company's profit by the applicable tax rate. Most tax authorities have disallowable expenses and tax incentives, so we need a tax calculation to determine the correct amount.

8.2 The Tax Calculation

A basic tax calculation could look like this:

Profit as per the accounts X

Add disallowable expenses X

Minus tax incentives X

Equals taxable profit X

The taxable profit is usually then multiplied by the appropriate tax rate.

8.3 Tax Journal

The tax is then posted to the accounts as a journal entry, dated at the end of the period - debiting tax expense account on the profit and loss statement and crediting the tax liability account on the balance sheet.

Save Tax!

You could be missing out on tax savings.

Consider using a qualified, licenced, and experienced accountant.

Or learn from me directly in my Accounting Mentor Program

Step 9: The Profit and Loss Account

Module overview:

The Basics
Retained Earnings
Profit b/f and c/f
And more

9.1 The Profit and Loss Account

With the tax now calculated, we can create a profit and loss account. Please note that the profit and loss account is not the same as the profit and loss statement, which is a financial report. It is a statement showing the profit brought forward, profit made in the financial period, withdrawn profit, and the profit remaining. In other words, it shows a company's retained earnings.

Let's have a look at an example:

Opening balance. This is the profit and loss account balance from the previous period.

Profit made. This represents the net profit earned during the accounting period after deducting taxes.

Dividends. These are the profits withdrawn by the company's shareholders during the financial period.

Closing balance. This is the remaining profit that the company has. This is an equity account. It is often named retained earnings.

Opening balance 10,500

Add profit 68,000
Minus dividends 45,000

Closing balance 33,500

The closing balance, or retained earnings, should be shown on the balance sheet under the equity section.

Step 10: Compiling the Profit and Loss Statement

Module overview:

The profit and loss statement
Review of the adjustments
Tips
And more

10.1 Compiling the Profit and Loss Statement

Please take my free bookkeeping and accounting course to learn how to compile a profit and loss statement. For this course, let me highlight some key areas of the profit and loss statement:

Sales X

Cost of Sales X

Gross Profit X

Expenses X

Profit before Taxation X

Tax X

Net Profit X

Cost of sales. For a business selling products, this should be the 'stock used' figure from your stock calculation.

Profit before taxation. This is not net profit.

Tax. This is the tax from the tax calculation.

Net profit. This is the profit figure after tax. It is used in the calculation of retained earnings (the profit and loss account).

Step 11: The Balance Sheet

Module overview:

The balance sheet
Review of adjustments
Tips
And more

11.1 The Balance Sheet

Once again, take my free bookkeeping course to learn how to compile a balance sheet. This course will highlight some key areas:

Assets

Fixed assets X

Current assets X

Total assets X

Liabilities

Long-term liabilities X

Current liabilities X

Net assets X

Equity

Share capital X

Profit and loss account X

Total shareholder funds X

Fixed assets. These will include the closing balances from your asset and depreciation calculations.

Current assets. These will include the closing balances from your stock calculation. They will also include the prepayments total.

Current liabilities. Ensure your accruals and taxation balances are included here.

Profit and loss account. This is the closing balance of your retained earnings calculation.

11.2 End

And that's it! The end of the course. Thanks for working through my material.

Learn from me!

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