What is year end?

What happens at year end?

The books are closed at that date and the year's figures are fixed. Everything up to it belongs to this year's accounts and tax; everything after belongs to next year's. Invoices raised, bills received, stock counted, and bank balances are all taken as at that day.

Then the adjustments. Accruals for costs incurred but not yet billed, prepayments for things paid in advance, depreciation on equipment, bad debts written off, and a stock valuation. These are what turn a list of transactions into a set of accounts, and they are mostly the accountant's work.

For a company, the accounting reference date is set at incorporation as the last day of the month the company was formed in, and can be changed. It drives the filing deadlines: accounts to Companies House within nine months of the year end, Corporation Tax paid nine months and one day after it, and the return filed within twelve months. For a sole trader, year end matters less since tax is now assessed on the tax year, but accounts still have to be made up to a date.

A worked example

A limited company with a 31 March year end. In the last week of March the director sends every outstanding invoice, so the sales land in this year, and chases the debtors, so the balance sheet looks like what it is. On 31 March she counts stock: £4,200 at cost.

In April the bookkeeper posts the adjustments. An electricity bill for February and March arrives on 12 April for £600 and is accrued into the March accounts. The annual insurance of £1,200 paid on 1 January has nine months to run, so £900 is carried forward as a prepayment. Depreciation of £2,000 on the van is charged. The trial balance is then handed to the accountant, who prepares the accounts for filing by 31 December and the Corporation Tax return with tax due by 1 January.

What makes a year end painful?

• —A bank reconciliation that has not been done since the last one, so the year's starting point is unknown.
• —Receipts in a drawer rather than against transactions, so the expense claims are guesses.
• —Money moved between the director and the company with no record of which way or why.
• —Stock never counted, so the cost of sales is invented.
• —Starting in the ninth month, when the deadline is what forces it rather than the calendar.