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Annual closing: Essential procedures for a smooth transition

Annual closing: Essential procedures for a smooth transition.

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As the year draws to a close, businesses must prepare for the annual closing process. Year-end closing involves various accounting procedures to finalise the previous year’s business activities, carry forward balances, and prepare for the upcoming year. This article outlines the key steps and considerations for a successful year-end closing in 2023.

What is year-end closing?

Year-end closing is an accounting procedure conducted at the end of the year to reconcile expenses and revenues, generate profit and loss statements, and compile necessary financial documents. Companies can ensure accurate financial reporting and analysis and prepare for external audits by completing this process.

What is needed for the closing?

Accountants need access to comprehensive accounting documents and information to facilitate the year-end closing. This includes all records of income, revenues, costs, and expenses incurred during the current year.

Supporting the data with legal documents, such as fapiaos (tax invoices), is essential. Additionally, any relevant supporting documents, such as receipts, contracts, and purchase orders, should be provided for transactions lacking fapiaos. It is recommended to perform reconciliations prior to the annual closing to identify mistakes and adjust in advance. Reconciliation is usually performed by checking the ledgers or balances with 3rd parties, such as bank statements, customers, suppliers, and warehouses, to cross-check the financial data on the book and identify possible accounting errors.

It is recommended to perform reconciliations prior to the annual closing to identify mistakes and make adjustments in advance. Reconciliation is usually performed by checking the ledgers or balances with third parties, such as bank statements, customers, suppliers and warehouses, to cross-check the financial data on the book and identify possible accounting errors.

Essential items for 2023

When preparing for the year-end closing, it is important to consider expenses and revenues specific to the calendar year 2023. Here are some key items to gather and document:

Expenses:

  • Salaries and social insurance charges for December
  • Rent paid in December (if typically paid in early January of the following year)
  • Various insurance premiums
  • Utility bills paid in the upcoming year
  • Annual performance bonuses, 13th/14th-month payments, untaken paid leave
  • Purchases of goods in transit that already belong to the company but have not been paid for
  • Accrued service fees, such as audit fees, not yet paid but incurred within 2023

Revenues:

  • Goods that have been shipped but are in transit to the client’s location
  • Completed projects in late December 2023 with pending payments and fapiaos

Inventory Management:

Companies with inventory must conduct a thorough stock take with external auditors to provide an accurate overview of their inventory status. Consider the following points during the inventory check:

  • Goods in the inventory without invoices or pending payment
  • Goods in transit with ownership transfer dates (FOB/CIF) determining whether they should be included in the current or next year’s inventory
  • Consignment goods located at the client’s site, which still belong to the company and must be registered in the inventory
  • Consignment goods located at the company’s site, which belongs to the supplier and should not be registered in the inventory

Addressing Missing Documents

It is crucial to ensure that appropriate documents, such as contracts, receipts, invoices, and purchase orders support all transactions and entries. Transactions lacking proper supporting documentation may lead to inaccuracies in accounting entries. Additionally, expenses without proper documentation are not tax-deductible and can impact net profit.

If an expense is used to offset an employee’s salary, tax authorities may reclassify it as taxable, leading to additional individual income tax obligations for the employee. Employers should promptly withhold and pay the required taxes to avoid penalties and interest charges.

Conclusion

By following the recommended procedures and ensuring the availability of accurate documentation, businesses can navigate the year-end closing process smoothly. Properly reconciling expenses, revenues, and inventory status allows for accurate financial reporting and compliance with taxation regulations. Adequate preparation and attention to detail will contribute to a successful year-end closing and set the stage for a productive year ahead.

Acclime can offer comprehensive assistance and expertise to streamline your year-end closing procedures and ensure compliance for a successful transition into the new year. Contact us for more details.


Contact our teams for expert support and further information about accounting & tax requirements in China to ensure you are compliant in the market.

Christophe Marquis, Director, Shanghai, c.marquis@acclime.com
Mei Qian, Accounting Services Director, q.mei@acclime.com
Emily Shi, Partner, y.shi@acclime.com