Year-end closing is the process of updating your accounts to accurately reflect your business’s activities before you finalize your financial statements. 

This includes making adjustments for things like expenses that have been incurred but not paid (like bills) and revenues for services you’ve provided but haven’t yet billed.

In this article, we’ll walk you through the steps of the year-end closing process.

This guide is also related to our articles on bookkeeping vs. accounting, understanding journal entries in accounting, and 14 common accounting errors and how to avoid them.

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Let’s dive in and demystify the year-end closing process together.

The year-end closing process

Here are the key steps to complete during the year-end closing process for your business:

  1. Reconcile accounts
  2. Make year-end closing entries
  3. Prepare trial balance
  4. Prepare financial statements
  5. Review & plan for next year

We’ll go through each step one-by-one.

Reconcile accounts

You need to be confident that your financial information is accurate and complete. Do this by reconciling your:

  • Bank accounts, credit cards, and loans: Match your records with your bank statements. Make sure every transaction in your books lines up with what’s in your bank, credit card, and loan statements.
  • Accounts receivable and payable: Check who owes you money and whom you owe. Update your records to reflect the current status of these accounts. 

Once you’re confident everything is reconciled and accurate, you can move onto your year-end closing entries. 

Make year-end adjusting entries

Year-end adjusting journal entries ensure financial records accurately reflect the year’s activities, adjusting for items like accrued expenses and unrecorded revenues.

Inventory adjustments

At year-end, it’s crucial to adjust inventory records to match the actual count from a physical inventory check. For example, if your books show 100 widgets but you only count 95, you need to account for the missing 5. This could be due to loss or error. 

An adjustment entry would debit the cost of goods sold and credit inventory to reflect this discrepancy, ensuring your financial statements accurately report inventory values.

Example Journal Entry:

  • Debit: Cost of Goods Sold $500
  • Credit: Inventory $500

Depreciation and amortization

To accurately reflect asset usage over the year, you must record depreciation for tangible assets and amortization for intangible assets. Suppose you have equipment valued at $50,000 with a 10-year life; you would record $5,000 as depreciation expense annually. At year-end, making these entries ensures your assets’ book values are in line with their real-world use and age.

Example Journal Entry:

  • Debit: Depreciation Expense $5,000
  • Credit: Accumulated Depreciation $5,000

Accruals and deferrals

Ensure all expenses and revenues are matched with their corresponding fiscal periods. For expenses like December’s utilities that you pay in January, you would record an accrual. 

Conversely, if you receive an advance payment for services to be provided next year, you would record a deferral. This aligns your financial records with the reality of cash flow and obligations.

Example Journal Entry (Accrual):

  • Debit: Utility Expense $300
  • Credit: Accounts Payable $300

Example Journal Entry (Deferral):

  • Debit: Cash $1,000
  • Credit: Unearned Revenue $1,000

Fixed Assets

Year-end is a time to update records for any changes in fixed assets, including purchases and disposals. For instance, if you bought a new vehicle for the business, you would add this asset to your balance sheet. 

If selling an old asset, you must remove it from the books and record any gain or loss. This ensures your financial statements reflect the current value of your physical assets.

Example Journal Entry (Purchase):

  • Debit: Fixed Assets $25,000
  • Credit: Cash/Bank Loan $25,000

Example Journal Entry (Disposal):

  • Debit: Cash $5,000
  • Credit: Accumulated Depreciation $15,000
  • Credit: Fixed Assets $20,000
  • Debit: Loss on Disposal of Asset $10,000 (if applicable)

Why this matters

Following these steps make sure everything lines up as it should, so you have a clear picture of where your business stands financially at year’s end. 

The goal is to close out the year with a set of financial statements that truly reflect your business’s financial health. This allows you to jump into the new year ready to grow and succeed.

Closing the books

Once you’ve gone through the process of reconciling accounts and reviewing your financial activities, it’s time to officially close your books for the year. 

Finalizing journal entries

Start by making sure all financial transactions for the year have been recorded. This includes everything from sales and expenses to adjustments for inventory, depreciation, and any errors you may have found along the way. Each of these transactions needs a journal entry if it hasn’t been recorded yet. Make sure to attach documentation to each year-end journal entry.

Closing temporary accounts to retained earnings

Next, you’ll close your temporary accounts. These are your revenue, expense, and drawing accounts that track the current year’s transactions. By closing these, you’re essentially saying, “This year is done, and here’s what we’ve made or spent.” 

You’ll move the balances from these temporary accounts into your retained earnings, which is a permanent account on your balance sheet. This process clears out the temporary accounts for the new fiscal year while updating your retained earnings to reflect this year’s business activities.

Preparing the trial balance

The final step in closing your books is preparing the trial balance. This is a check to ensure that your books are balanced, meaning your total debits equal your total credits after all adjustments and closings. You’ll list all your accounts and their final balances to see everything lines up. If your debits and credits match, you’re good to go. If not, you’ll need to review your entries to find and correct any discrepancies.

Financial statements preparation

After closing your books, the next step is to prepare your financial statements. This is where you compile all the data you’ve gathered and organized throughout the year into structured reports. The most common financial statements are:

  1. Balance Sheet
  2. Profit & Loss
  3. Cash Flow Statement

These statements give you (and anyone else interested) a clear view of your business’s financial health. 

Notes and disclosures

Alongside these statements, notes and disclosures provide additional context and detail. They might explain accounting methods used, detail specific transactions, or disclose commitments not fully evident in the financial statements. 

These notes are essential to your financial reporting, providing clarity and a better understanding of your financial statements.

Reviewing and planning for the new fiscal year

After you’ve navigated the year-end closing and prepared your financial statements, it’s time to look ahead. Here’s how to approach this important phase.

Analyzing financial performance

Begin with a thorough analysis of your financial statements. This involves comparing your actual performance against your past year’s goals or industry benchmarks. 

Pay attention to key metrics such as profit margins, cash flow, and return on investment. Identify trends, both positive and negative, and understand their implications. For example, if your expenses grew faster than revenue, figure out why and how to address it. This analysis gives you a clear picture of where your business stands and what it can improve.

Setting goals and budgets for the new year

Set realistic and achievable goals for the new year. These might include increasing revenue by a certain percentage, reducing expenses, expanding your product line, or entering new markets. 

Next, create a budget that aligns with these goals. Your budget is a financial expression of your business plan for the coming year, detailing how resources will be allocated to achieve your objectives. Make sure it’s flexible enough to adapt to unexpected changes while keeping you on track towards your goals.

Common pitfalls in year-end closing

Year-end closing is a critical period for small businesses, but it’s also a time when common pitfalls can create unnecessary stress and complications. Being aware of these potential issues and knowing how to avoid them can save you time, money, and headaches. Here’s what to watch out for.

Procrastination and poor record keeping

Waiting until the last minute to organize your financial records or start the year-end closing process can lead to errors, omissions, and a whole lot of stress. The same goes for sloppy record keeping throughout the year.

How to avoid:

  • Stay organized: Make it a habit to keep your financial records organized and up to date throughout the year. Use accounting software to track transactions in real-time.
  • Schedule regular reviews: Set aside time monthly or quarterly to review your financials. This can help catch and correct issues early, making year-end a smoother process.

Inaccurate inventory counts and asset tracking

Miscounts or mismanagement of inventory can lead to inaccurate financial statements, affecting your business decisions. Similarly, failing to track assets properly can result in incorrect depreciation calculations and asset valuations.

How to avoid:

  • Conduct regular inventory checks: Don’t wait for year-end; perform regular inventory counts and compare them against your records to adjust discrepancies promptly.
  • Maintain an asset register: Keep a detailed record of assets, purchase dates, and amounts to streamline depreciation calculations and ensure accurate asset tracking.

Misunderstanding tax obligations

Taxes can be complex, and misunderstandings about what is owed or how to report it can result in penalties and interest.

How to avoid:

  • Educate Yourself: Stay informed about tax laws relevant to your business. This might include sales tax, employment taxes, and income taxes.
  • Seek Professional Help: Consider consulting with a tax professional or accountant, especially for complex issues or significant financial decisions. They can offer advice tailored to your business and help avoid costly mistakes.

Falling into these pitfalls can not only make your year-end closing more challenging but also impact your business’s financial health. By staying organized, keeping accurate records, and understanding your tax obligations, you can avoid these common issues.


We’ve broken down the year-end closing process into simple steps to help small business owners smoothly transition into the new year. 

By organizing documents, reviewing finances, reconciling accounts, and adjusting inventory, you can finalize your books and use this data for strategic planning. This not only helps in managing tax obligations efficiently but also in identifying areas for improvement and setting realistic goals. 

Take this chance to review last year’s successes and plan for future growth, making year-end a key time for strategic development.

Next, check out our articles on how to calculate burn rate, how to hire a virtual bookkeeper, and what are back office services.

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FAQ: Year-End Closing for Small Businesses

Here's some answers to commonly asked questions about Year-End Closing for Small Businesses.

What is year-end closing in accounting?

Year-end closing in accounting refers to the process of finalizing a business’s financial activities for the fiscal year to prepare for the next. This involves reconciling accounts, reviewing and adjusting inventory records, calculating depreciation and amortization, and ensuring all financial transactions are accurately recorded. The goal is to close the books on the past year, enabling the preparation of financial statements that reflect the business’s financial health.

Why is the year-end closing process important?

The year-end closing process is essential for making informed decisions, planning for the future, and demonstrating the business’s financial position to investors, lenders, and other stakeholders. 

Moreover, a thorough year-end closing helps businesses identify any financial issues or areas for improvement, ensuring compliance with tax laws and reducing the risk of errors or fraud. It sets a foundation for strategic growth and financial stability in the new fiscal year.

How can I avoid common pitfalls during the year-end closing process?

Stay organized and keep accurate records throughout the year. Using accounting software can help track transactions in real-time and streamline the reconciliation of accounts. Regularly scheduled reviews of financials can catch and correct issues early, making the year-end process smoother.

Conducting regular inventory checks and maintaining an up-to-date asset register will ensure accurate financial reporting. Lastly, staying informed about tax obligations and seeking professional advice when necessary can prevent costly mistakes and ensure compliance with tax laws.