Year-end closure of accounts

Introduction

Year-end closure of accounts in UAE

Year-end closure of accounts is an accounting process and procedure practiced at the end of the year  for ascertaining business holding financially and operatively by closing out business from the previous year, carry forward balances from the previous year, and open posting accounts for the upcoming year. Year-end closure of accounts is part of a company’s closing operations, and is used to create a company’s financial statements.

Contents of the post

• Year-end closure of accounts in UAE
• Determining Closing Date for Year-end closure of accounts in UAE
• Closing the Books for Year-end closure of accounts in UAE
• Closing Entries for Year-end closure of accounts in UAE
• Temporary accountsand Permanent accounts for Year-end closure of accounts in UAE
• Transfer of Temporary Accounts for Year-end closure of accounts in UAE
• Scenario to understand closing of temporary accounts
• Process for Year-end closure of accounts in UAE
• Reach Online VAT Accounting Software for year-end closure of accounts in UAE
• Conclusion

Determining Closing Date for Year-end closure of accounts in UAE

This is a date when further invoice processing is stopped i.e. 2 or 3 weeks after the end of the financial year. Any invoices received after this date would be paid in the following financial year, similarly any income received should be lodged in the bank in the following financial year.

Closing the Books for Year-end closure of accounts in UAE

At the end of a financial year, all temporary accounts should be closed with zero balance. Temporary accounts accumulate balances for a single fiscal year and are then emptied. Permanent accounts accumulate balances on an ongoing basis through many fiscal years.

Few of the temporary accounts are for revenue, expenses, gains, and losses – essentially any account that appears in the income statement. The income summary account, account used to club temporary account balances before moving the net balance to permanent account, is also a temporary account. Entire balance in every temporary account should be transferred into retained earnings, which is a permanent account. Permanent accounts are those that appear on the balance sheet, such as asset, liability, and equity accounts.

Closing Entries for Year-end closure of accounts in UAE

Closing entries, otherwise called closing journal entries, are entries passed at the end of an accounting period to zero temporary accounts and transfer their balances to permanent accounts. In other words, the temporary accounts are closed or reset at the end of the year. This is commonly referred to as closing the books.

Temporary accounts and Permanent accounts for Year-end closure of accounts in UAE

Temporary accounts are income statement accounts prepared to understand the accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the term of the company

Permanent accounts are balance sheet accounts that records the business transaction which extends for more than an accounting period. For example, a vehicle account is a fixed asset account that is recorded on the balance. The vehicle will provide benefits for the company in future years, so it is considered a permanent account.

End of the fiscal year, all the temporary accounts must be closed or reset, so the beginning of the subsequent year will have no carried forward balance to start with. Therefore, revenue, expense, and withdrawal accounts always have a zero balance at the start of the year because they are always closed at the end of the previous year. This concept is consistent with the matching principle.

Transfer of Temporary Accounts for Year-end closure of accounts in UAE

Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account. Both ways have their advantages.

Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the closure of temporary account should be equal to the net income for the period. Transferring temporary accounts to the retained earnings account is more convenient than using the income summary account method because it saves a step. There is no need to close temporary accounts to another temporary account (income summary account) in order to then close that again.

Both closing entries are acceptable and both result in the same outcome. All temporary accounts eventually get closed to retained earnings and are presented on the balance sheet.

Scenario to understand closing of temporary accounts

In this example we will close Khan’s, Inc.’s temporary accounts using the income summary account method from his financial statements in the previous example.

There are three general closing entries that must be made.

Close all revenue and gain accounts

All of Khan’s revenue or income accounts are debited and credited to the income summary account. This resets the income accounts to zero and prepares them for the next year.

Close all expense and loss accounts

All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary.

Close all dividend or withdrawal accounts

Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account. These accounts are closed directly to retained earnings by recording a credit to the dividend account and a debit to retained earnings.

Now that all the temporary accounts are closed, the income summary account should have a balance equal to the net income shown on Khan’s income statement. Now Khan must close the income summary account to retained earnings in the next step of the closing entries..

Process for Year-end closure of accounts in UAE

There are several accounting tasks before the year ends. Books of account should be organized and set up for a smooth transition into the new financial year.

Compile financial statements

Statements are financial tools for the business. Statements show   past and current finances figures to plan business operations based on it.

Use information recorded in your accounting books to compile year-end accounting statements. There are three important financial statements you should create.

The profit and loss statement summarizes revenue and expenses. List all the profit gained and lost during the year on your profit and loss statement for small business. The bottom line will show the difference between money gained and lost.

The balance sheet shows your annual assets, liabilities, and capital. A small business balance sheet is another way of looking at your finances. You can see how much capital you have and how much money you owe.

The cash flow statement shows how changes in income and expenses affect your cash on hand. Cash flow reporting doesn’t just measure money available. It also shows the timing in which money comes in and out of your business. You can see which months are high and low for cash on hand.

These types of accounting records will help you understand your financial health, and will ultimately make tax season less stressful.

Collect past due invoices

Prepare a debtors list: This is a list of people or organisations that owe us money at the end of the accounting period, but have not yet paid us.

Collection of due invoices for which payment is pending. You should avoid rolling late payments over into the new year. There are several steps you can take to collect from a customer who won’t pay.

Contact the late-paying customer to find out why you have not received any money from them. They might have simply forgotten about the invoice. Or, they might only be able to pay part of the amount due. Negotiating your invoice payment terms could help you get paid faster. Send reminders to the customer until the invoice is paid.You might need to hire a collection agency to help you collect a late invoice. When the customer pays, the collection agency will keep a portion of the total amount due.

Similarly, prepare a creditors list,this is a list people or organizations that we owe money to, at the end of the accounting period, but have not yet paid. These will be the invoices received but have not yet paid. 

Organize your receipts

Disorganized receipts put your business at risk for incorrectly recorded books. Messy records heighten your chances of making errors on your business tax return. And, you might miss out on small business tax deductions. To deduct an expense, you need to show proof. If you lose the receipt, you don’t have evidence of the business purchase.

5. Reconcile your bank accounts

To reconcile your bank accounts, compare your bank statements to your accounting records. As part of your year-end accounting procedures, your bank statements should match the balance in your books.

You may need to adjust one of the records for the balances to be equal. For example, you might see earned interest on a bank statement that might not be recorded in your books yet. In that case, you would add the interest earned to your books.

The Cash Book: This must be updated, ensuring that the payments and receipts are analysed and added up month by month.

Perform a bank reconciliation, highlighting all the unmatched items which will either be income lodged or cheques paid which haven t yet been updated by the bank and hence do not appear on the bank statement.

Prepare an accruals schedule (list). This similar to the above, but where the creditors figures are usually known, the accruals are based on estimations, this represents expenditure we have incurred but for which we have not yet received a bill, such as electricity, gas and rates. These bills are received every three months, so we have to make an allowance for these expenses by estimating a figure based on previous bills.

Prepare a prepayment list: This is the exact opposite of an accrual in that it relates to the expenses or amounts that we have paid for but relate to a future period. Common examples of these are insurance premiums and rent, which are usually paid for in advance of use.

Other Information required for year-end closure of accounts in UAE

The Cash book and petty cash book Bank statements for the financial year being audited .All details of the bank reconciliations done during the year Bank paying-in books, and cheque book stubs for the year All invoices paid, in date order and documents to support payments that do not have an invoice Details of all the equipment purchased during the year i.e. fixed assets like computers, office furniture and transport All letters and cheque counterfoils relating to receipts and in particular grants received and receivable All details of salary records Minutes of the Annual General meeting and Management Committee meetings held during the year. Also names and addresses of members who held office during the year Copies of the organization’s constitution and the previous year’s accounts a copy of the Trustees Annual Report .

Conclusion

On the completion of year-end process, all of the temporary accounts are transferred and therefore “closed” for the current fiscal year. Thus, the only accounts closed at year end are temporary accounts. Permanent accounts remain open at all times.

Reach Online VAT Accounting Software for year-end closure of accounts in UAE

Designed meticulously to suit 21 different types of business. It’s a suite of software integrated in one  software to manage different verticals of the business. It is an online VAT accounting software that can automatically manage your book of accounts, taxes, inventory, sales, purchases and more online quickly and securely. Reach accounting software is 100% online Use the simple cash-in, cash-out system to complete your accounting in a few short steps.A flag in the accounting software is set to close down the old fiscal year, which means that no one can enter transactions during that time period. Another flag can be set to open the next fiscal year, at which point the same temporary accounts are opened, now with zero balances, and are used to begin accumulating transactional information for the next fiscal year