Understanding Year-end Adjustments

Understanding Year-end Adjustments

The journal entries that the accountants would make to some general ledger accounts when a fiscal year has ended are year-end adjustments (Also see An Overview of Adjusting Entries). The objective of making these adjustments is to generate a set of books which complies with the relevant accounting frameworks. The accountants may need to make a lot of year-end adjustments, and this relies on how diligently they have been maintaining the books every month.

If you are an entrepreneur who is running a small business and do not usually put in much effort in doing the accounts, the process of closing your books during the year-end can be very challenging (Also see Accounting Tasks to Consider Before the Year Ends). To avoid problems from arising from making year-end adjustments because of messy books, you should hire an accounting firm in Johor Bahru to help you out.

The number of adjustments that the accountants need to make will affect the time they need to deal with the process of closing the books. For example, if the company has a lot of suspense accounts as the business owner does not  review these accounts regularly, the accountants will need longer time to identify the nature of those transactions before putting them into the correct account. Some examples of year-end adjustments are as follows:

Charges associated with amortisation and depreciation on fixed assets.

Some business owners who run a small business would not choose to recognise amortisation and depreciation (Also see Accounting – 3 Common Depreciation Methods) every month. Instead, they will only do so once a year, which is at the year-end.

Accrual of revenue which the company has earned yet has not billed.

As an instance, according to the contract, the company can only bill its client when it has completed the underlying project. Thus, the accountant should accrue revenues that the company has earned before that.

Accrual of expenses for the supplier invoices that the company has not received.

As an instance, the company may receive interest billing from the bank late. Hence the accountant should accrue the expense.

Accrual of payroll expenses for the hours that the employees have worked, but the company has not paid them.

As an instance, the company pays the salaries on the 28th day of a month, which has 30 days. Therefore, the accountant should accrue the payroll expense for the last two days for that month (Also see How Does Internal Control Help in Overcoming Payroll Fraud?).

Changing the classification of the transactions.

As an instance, the accountant may change the classification of a part of an amount due under a long-term debt and put it under the category of the short-term debt. This is because that amount of debt is due and payable in a year.

Adjustments to the general ledger accounts that the company has reconciled.

As an instance, an accountant reviewed the prepaid expense account (Also see Accounting for Prepayments) and found out that the company has left out some of the items which it should have charged to expenses in the previous months. So, the accountant will charge off those items at year-end.

Adjustments made according to the issues that the external auditors have found out.

As an instance, the auditors found out that the company has overstated its ending inventory by RM50,000. Therefore, the accountant needs to make a year-end adjustment to correct it to the right figure.

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