Account finalization means ensuring that the books of accounts are correct, complete, and accurate. Typically, this process occurs at the end of the financial year.
However, it’s considered a best practice to check and reconcile accounts periodically, such as on a monthly or quarterly basis. Here are the steps to be taken during the finalization of books of accounts:
1. Steps of Ledger Scrutiny
To guarantee accuracy and integrity, an exhaustive list of measures must be taken when examining a ledger. Here are some essential methods for scrutinizing ledgers:
i) Match Balances
Start by reconciling the opening and closing balances of ledgers as per audited financial statements to ensure consistency and accuracy of books
ii) Chronological Order
Verify the date and day of each entry to maintain the chronological flow of transactions.
Ensure that the entries are correctly dated and aligned with the corresponding business day
iii) Voucher Verification
Scrutinize the voucher type associated with each entry to validate its authenticity.
Check the voucher number and supporting documentation for each transaction to ensure consistency.
Confirm that the voucher numbers match the corresponding records and are accurately recorded.
iv) Data Classification and Posting
Examine the heads of expenses and incomes and grouping of ledgers to ensure proper categorization and allocation.
Ensure that all transactions are properly classified based on their nature and purpose.
Verify that the correct accounts and categories are utilized for accurate posting and analysis
Double-check the posting of transactions to prevent any misclassifications or errors.
v) Utility Expense Analysis
Analyze and check utility bill expenses to track expenditures and must have supporting documents of utility expense
vi) Asset Accounting
Scrutinize fixed asset purchases or sales, all new asset purchases are properly capitalized and including the methodology (WDV and SLM) and calculation of depreciation, to accurately reflect asset values and depreciation expenses.
vii) Debtor and Creditor
Review debtor accounts to eliminate credit balances and creditor accounts to eliminate debit balances, ensuring accurate representation of financial obligations.
2. Prepare a bank reconciliation statement
To compare the bank’s records with your books and prepare a bank reconciliation statement. This makes it easier to spot any differences between the Banks and the Books. It’s similar to the double-checking Process.
3. Checking GST Returns
Reconcile the Sales and purchases shows in the books vs Output tax and Input tax with GST Returns
4. Clear Suspense account
Address any unclear or unresolved transactions to ensure that your financial records accurately reflect the true state of your Books
5. Stock Valuation
Make sure to value your stock properly, Stock is valued on cost or net realizable value whichever is lower
6. Third party Confirmation
Extract the Customer and Vendor Ledger and get confirmation from your customers and vendors about the balances owed to or by them.
7. Bad Debt Entries
Pass the Bad Debts Entries after discussion with Management to reflect this reality in your financial records.
8. Keeping Cash Flow Positive
Make sure your cash expenses stay within limits and that have no Negative cash balance throughout the year. This is crucial for maintaining healthy cash flow and financial stability.
9. Made Provisions
Make provision of outstanding and pre-paid expenses such as insurance premiums or salaries for work performed but not yet paid (eg. April Salary). This ensures that your financial records accurately reflect your current financial obligations.
10.Recording Business Expenses
Ensure that all expenses related to your business operations are properly recorded in your financial records. This includes expenses such as rent, utilities, Audit Fees, and Accounting Charges.
11.Separating Personal and Business Expenses
If any personal expenses were mistakenly recorded as business expenses, then at the time of calculation of profit for the tax those expenses should be added back to the profit.
This ensures that your financial records accurately reflect the financial performance of your business separate from personal finances.
12.Managing Petty Cash
Keep track of petty cash expenses to ensure that they are properly accounted for and reconciled regularly.
This helps to maintain control over small cash transactions and ensures accurate financial reporting.
13.Comparing Expenses Year Over Year
Compare Expenses with the Previous Year Expenses on the of turnover and if you find any major variation in any ledger then check again correctness and record the reason for the variation
14.Matching TDS Receivable with 26AS
Matching TDS Receivable with Records: Ensure that any TDS receivable shown in books matches with 26AS. This helps to ensure accuracy in your tax filings and financial reporting.
15.Checking TDS Payable
Confirm that any tax deductions, such as TDS (Tax Deducted at Source), have been correctly withheld and paid on time. This ensures compliance with tax regulations and prevents any penalties or fines.
16.Meeting Statutory Obligations
Ensure that statutory dues such as Provident Fund (PF), Employee State Insurance (ESI), and other statutory payments are properly recorded and paid on time. This helps ensure compliance with legal requirements and avoids any penalties or fines
17.Analyzing Profit Ratios
Compare your gross and net profit ratios with last year’s to see if there are any major changes that need attention so discuss with Management
18. In case of Partnership Firm
- Interest on Capital as per Partnership dead
- Remuneration to Partners does not exceed the limit as specify in Income tax act.
19. Miscellaneous Points
- Make sure no entry shows on National Holiday
- Interest Payable and receivable on loans and investment properly recorded
- The narration of the entry should proper and complete.