Closing starts before 31 December
Year-end closing is not a single entry on the last day, but a process that starts weeks before the year ends: setting the date of the stock count, informing branches of the deadline for submitting documents, and writing to banks, customers and suppliers for confirmations. The following list is ordered according to the sequence of work.
Phase one: counts and reconciliations
- Cash count: count the cash boxes and cash advances on the last day in the presence of a responsible person, and sign the count report.
- Bank reconciliations: for every bank account, with an explanation of every open item.
- Inventory count: a physical count compared with the books, identifying damaged, slow-moving or expired items, and valuing inventory at the lower of cost and net realizable value.
- Customers and suppliers: reconcile the subsidiary ledgers with the control account, send confirmations for large balances, and prepare the debt ageing report.
- Fixed assets: a physical count reconciled with the fixed asset register, and derecognition of items sold or damaged.
- VAT: reconcile the output and input VAT accounts with the year's returns, and resolve any differences before closing.
Phase two: adjusting entries
Example of year-end adjustments in a trading business (in SAR):
| Adjustment | Debit | Credit | Amount |
|---|---|---|---|
| Inventory count shortage (books 615,000, actual 600,000) | Cost of sales or inventory losses | Inventory | 15,000 |
| Depreciation for the final month of December | Depreciation expense | Accumulated depreciation | 6,500 |
| Unbilled December electricity | Electricity expense | Accrued expenses | 4,000 |
| Unexpired portion of insurance | Prepaid insurance | Insurance expense | 9,000 |
| Credit loss allowance for a defaulting customer | Credit loss expense | Allowance for credit losses | 12,000 |
| Updating the end-of-service benefit provision | End-of-service benefit expense | End-of-service benefit provision | 18,000 |
| Estimated Zakat for the year | Zakat expense | Zakat payable | 25,000 |
Together these adjustments reduce profit by 71,500 SAR (15,000 + 6,500 + 4,000 + 12,000 + 18,000 + 25,000 - 9,000). Had they been omitted, profit would have been overstated by this amount.
Also do not forget: accrued revenue not yet billed, revenue received in advance for services not yet provided, foreign exchange differences on foreign currency balances, and accrued loan commissions.
Phase three: the trial balance and closing entries
- Run the post-adjustment trial balance and review every illogical balance: a cash box with a credit balance, a supplier with a debit balance, or a negative expense.
- Prepare the draft financial statements, compare them with the previous year, and ask for an explanation of every significant change.
- Record the closing entries: revenue and expenses are closed to the income summary account, then net profit is closed to retained earnings.
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Closing revenue | Sales and other income | Income summary | 3,020,000 |
| Closing expenses | Income summary | Cost of sales, expenses and Zakat | 2,725,000 |
| Transferring net profit | Income summary | Retained earnings | 295,000 |
After that, the new year starts with zero balances in the revenue and expense accounts, and balances brought forward in the financial position accounts. Lock the period in the system to prevent any posting dated in the closed year without authorization.
Phase four: statutory deadlines
- Zakat or income tax return: filed and paid within 120 days of the end of the financial year, i.e. around 30 April for a year ended 31 December, through the Zakat, Tax and Customs Authority (ZATCA) portal.
- Qawaem platform: companies subject to the Companies Law file their annual financial statements within six months of the year end, i.e. by 30 June for a year ended in December, after they are audited by a licensed auditor where required.
- The VAT return for the last period of the year is filed by the end of the following month.
Suggested closing timetable
| Timing | Task |
|---|---|
| Mid-November | Set the stock count date and circulate the deadline for receiving invoices and documents |
| Early December | Send confirmations to banks and to major customers and suppliers |
| 31 December | Count cash and inventory, with a temporary freeze on movements during the count |
| First week of January | Bank reconciliations and reconciliation of subsidiary ledgers |
| Second and third weeks | Adjusting entries, provisions and the adjusted trial balance |
| End of January | Draft statements and handing the closing file to the external auditor |
| Before 30 April | File and pay the Zakat or tax return |
| Before 30 June | File the approved statements on the Qawaem platform |
This timetable suits a medium-sized business and can be compressed for small businesses. What matters is that it is written down and distributed to those responsible before work starts, and that you review it at the end of each closing season to improve it the following year.