Examining End-of-Period Bookkeeping Procedures
Even if all transactions during the year (or other business period) have been recorded correctly, the business’s accounts still aren’t quite ready for preparing the financial statements. Additional procedures are necessary at the end of the period to bring the accounts up to snuff for preparing financial statements for the period. Two main things have to be done at the end of the period:
Record normal, routine adjusting entries: You may not have associated certain expenses and income with a specific transaction, and, therefore, you didn’t record those expenses and income. Well, record them now! For example, depreciation expense isn’t a transaction as such and therefore isn’t included in the flow of transactions recorded in the day-to-day bookkeeping process.
You need to make these kinds of adjustments to have correct balances for determining profit for the period, making the revenue, income, expense, and loss accounts up-to-date and correct for the year.
Check for developments that may affect the accuracy of your accounts: For example, the company may have discontinued a product line. You may have removed the remaining inventory of these products from the asset account, with a corresponding loss recorded in the period. Layoffs and severance packages are another example of what you need to look for before preparing reports.
Lest you think of accounting as dry, dull drudgery, understand that end-of-period accounting procedures can stir up controversy of the heated-debate variety. These procedures require that the accountant make decisions and judgment calls that upper management may not agree with. For example, the accountant may suggest recording major losses that would put a big dent in profit for the year or cause the business to report a loss. The outside CPA auditor (assuming that the business has an independent audit of its financial statements) often gets in the middle of the argument. These kinds of debates are precisely why business managers need to know some accounting: to hold up their end of the argument and participate in the great sport of yelling and name-calling — strictly on a professional basis, of course.