Year-end adjustments are journal entries made to various general ledger accounts at the end of the fiscal year, to create a set of books that is in compliance with the applicable accounting framework. A number of year-end adjustments may be required, depending on how diligently the books have been maintained on a monthly basis. The number of these adjustments that are needed has a direct impact on the time required to close the books.
Examples of year-end adjustments are:
- Accrual of expenses for which supplier invoices have not yet been received. For example, an interest billing from the bank may arrive late, so the expense is accrued.
- Accrual of payroll expenses for hours worked that have not yet been paid. For example, wages are paid through the 28th day of a 30-day month, so the wage expense for the final two days must be accrued.
- Accrual of revenue that has been earned but not yet billed. For example, a contract mandates that billing can only occur at the completion of the underlying project, so revenues earned prior to that point must be accrued.
- Depreciation and amortization charges on fixed assets. Some smaller businesses do not bother to recognize depreciation and amortization on a monthly basis, choosing to instead do so just once, at the end of the year.
- Adjustments to general ledger accounts that have been reconciled as part of the closing process. For example, a review of the prepaid expenses account reveals that several items should have been charged to expense in prior months, so these items are charged off at year-end.
- Reclassification of transactions from one account to another. For example, a portion of the amount due under a long-term debt arrangement is reclassified as being a short-term debt, since it is due and payable within one year.
- Adjustments based on issues found by the outside auditors. For example, the auditors find that the ending inventory is overstated by $10,000, and require that a year-end adjustment be made to correct the situation.