These accounting procedures are carried out by all the accountants in all the organisations (for profit or non-profit). However, I do not know of a single accounting text book that shows the best practices.
Let us start with some clarifications:
What are the objectives?
When should you carry them out?
As the name suggests, year-end accounting procedures are carried out after the financial year ends but before the Financial Statements are prepared. Month end procedures can be carried out each month in a slightly different way which is explained later on.
What are these procedures?
Ideally, these year-end procedures should include the following. However, they should be adapted to suit the needs of the organisation.
These will include checking the cash/petty cash with the cash book, physical verification of the inventory (of raw material, components, finished goods, goods for resale etc.) with the records kept. Also a very important reconciliation would be that of Non-current Assets (also called Fixed Assets) with the records kept.
These will include bank reconciliations, reconciliation of suppliers' accounts with the statements sent by them and sending out statements of accounts to customers. Reconciling customers' and suppliers' accounts at least once a year is vital. All accounts with unusual or odd balances should be investigated. For example, any customer's account with a credit balance should be investigated (since they are expected to have a debit balance in your records).
Doing a thorough scrutiny of ledger accounts of the nominal ledger (or general ledger)
An experienced accountant will be able to scrutinise the ledger accounts and find unusual patterns or inconsistencies. For example, a rent account which is paid every month should have 12 transactions for an accounting year. Any other number will require further investigation and necessitate adjustment either for accrual or prepayment.
4.Year-end adjustment entries
These journal entries are passed to make the Financial Statements more meaningful, relevant and also to adhere to the accounting concepts of prudence and accrual. Normally, these adjustment entries will include the entries for:
5.Closure of Revenue Accounts
Once, the adjustment entries are passed, all revenue accounts are closed for the accounting year and the balances transferred to the Income Statement (Statement of Profit or Loss). Depending on the legal format of the organisation, net profit (or loss) arising from the Income Statement is then transferred to the Capital or Retained Earnings (for limited companies).
6.Closure of Non-Revenue Accounts
Non-revenue accounts are closed with their respective closing balances for the year and a Balance Sheet (Statement of Financial Position) is drawn.
One major difference between revenue and non-revenue accounts is that the revenue accounts are closed each year with their respective debit or credit balances absorbed by the Income Statement. On the other hand, the non-revenue accounts are closed with their closing balances which become their opening balances for the next financial year. All revenue accounts will be opened afresh (without any opening balance) for the next financial year.
Monthly management accounts
A set of similar procedures can be applied to prepare monthly management accounts. However, following alternative treatments can be applied:
Bharat Shah (B.Com; A.C.A.; M.B.A.) has over 15 years of industrial experience at senior level and teaches at Learning Academy. He has taught ACCA / AAT subjects at FE and private colleges. The views expressed herein are the personal views of the author and not necessarily of the organisation.