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To Issue Accurate Financial Statements, You Need a Close Process

Financial statements provide useful financial information about the reporting entity to existing and potential investors, lenders, and other creditors for decision making.

As a financial statement captures the financial effect of all activities carried out in the business, the accountant must coordinate with different parts of the business to get accurate and timely information to update the accounts.

Once he gets the information, he needs to perform some activities to prepare the financial statement. To control all this, the accountant needs a close process.

Accounting Close

The accounting closing process are the steps required to update the accounts for preparing the financial statement and the start of the next accounting period. The close process comprises steps to transfer temporary account (revenue and expenses) to make the general ledger ready for the next accounting period.

The process involves classifying and recording all business transactions that happen in the relevant period, reconciling all relevant accounts, generating a trial balance, and preparing a set of financial statements. It also involves getting information to prepare disclosures.

Businesses with good close processes perform close activities throughout the year, and not just at the year end. We can classify close activities as monthly close and year-end close activities. Monthly close activities are those carried out each month, while year-end close activities occur at year-end.

Monthly Close Activities

  • Ensure you record all transactions such as bills, expenses, invoices, that occurred in the month. You must apply the recognition and measurement criteria of the relevant IFRS standard to the transactions.
  • Reconcile accounts.

Below are examples of accounts to reconcile:

    • Bank Accounts.
    • Prepaid expenses.
    • Accrued expenses.
    • Depreciation.
    • Accounts receivable.
    • Accounts payable.
    • Fixed assets.
    • Loans.
  • Run the aged receivable report to assess collectability and calculate the bad debt provision.
  • Get a detailed list of aged accounts payables and investigate overdue account payables.
  • Calculate fixed asset depreciation.
  • Prepare a list of the prepaid expenses and reconcile to the general ledger balance.
  • Review accruals and prepaid expenses and make any change required.
  • Prepare a detailed list of taxes withheld and reconcile to the general ledger.
  • Reconcile the VAT, WHT, Levies, Statutory liabilities to the returns filed with Ghana Revenue Authority
  • Ensure you have filed all statutory filings by their due date.
  • Prepare and review journal entries.

Year-end Close Activities

The year-end close activities are additional activities performed at the year-end to prepare the annual financial statement. Below are examples of year-end close activities:

  • Review the accounts receivable and estimate bad debt provisions. If required, get management’s authorization.
  • Review accruals to ensure it is valid and reconcile to the general ledger balance.
  • If the business carries inventory, ensure that the business does an inventory count, values the inventory and pass adjustments to reflect the value in the accounts.
  • Review all general ledger accounts and write of balances approved by management.
  • Review the self-estimate returns filed by comparing with projected profit/loss for the period and file a revised return, if any.
  • Afteryou close the books, prepare the financial statements.

Closing with Technology

Cloud accounting Software’s like Xeroassist with the closure by:

  • Automating journal posting, reconciliations and extraction of ledger details.
  • Automatically rolling balances over to the next period.
  • Providing reporting templates populated with required numbers to facilitate preparing the financial statement.

Conclusion

The examples above are not exhaustive. You must tailor the close process to your business. Since financial statements reflect the financial effect of all the activities of the business, you must co-ordinate with operations, so you get required inputs in time.

When you get the information, you must perform different activities to validate the information and update the accounts. Without a carefully planned and controlled process, you risk issuing inaccurate financial statements.

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