Closing operations

Companies that keep double-entry accounting are required at the end of the reporting period to prepare financial closure that precede the financial statements. How to do it correctly and what to watch out for?

As you learned in the previous newsletter, each financial statement is an integral complex and must at least consist of a balance sheet, a profit and loss account and notes that explains and supplements the information in the previous two statements.

What operations precede the preparation of the financial closure?

An important advance of the financial closure is the inventory. It establishes the actual balances of assets and liabilities and records them in the inventories. All components of assets and liabilities are subject to inventory.

Entities may commence the inventory not earlier than four months before the balance sheet date and complete the inventory no later than two months after the balance sheet date, and are required to demonstrate the inventory for 5 years after the inventory pursuant to Section 29 (3) of Act 563/1991 Coll. about accounting.

Inventory can be physical determining the actual balance of property by counting, measuring and weighing, such as stocks and petty cash. Based on the findings is made the physical inventory list.

What does the correct inventory listing contain?

It is sufficient to prepare the form on one A4 page, where the identification data of the entity, the date of the inventory taking, the physical value of the inventories or the calculated cash are stated. The signature by person responsible for the inventory counting and final approval from superior should be also attached. Lastly the indication of the method of ascertaining the actual value of stocks and cash and the moment when the stocktaking starts and ends.

Ascertained inventory differences, i.e. surpluses and shortages, are recognized in profit or loss in the accounting period for which the inventory is checked.

Secondly, the documentary inventory is used to find out the actual state of assets and liabilities for which physical inventory, such as receivables and payables, cannot be performed. In doing so, the actual situation is determined on the basis of various documents for example invoices and preparing breakdowns of individual components of assets and liabilities.

What types of inventory apply to each balance sheet item?

When inventorying fixed assets, we have the opportunity to use physical and documentary inventory, stock is carried out primarily using physical inventory as well as short-term financial assets, where we determine the cash, valuables, while documentary inventory to agree bank accounts, credit status, etc.

Inventory of receivables and payables is carried out exclusively by means of a documentary inventory, which verifies the existence of receivables and payables based on invoices, the suppliers are best addressed and the balance of open liabilities is confirmed with them. The inventory of equity is carried out by means of various resolutions, decisions, approval of economic results, etc.

What closing operations need to be performed?

The financial closure includes a final audit of accounting and booking specific cases at the balance sheet date. The most common closing operations are:

• Depreciation of fixed assets - the value of the assets is not reflected in the costs as a one-off acquisition and is gradually reflected in the costs in the form of depreciation. Accounting depreciation reflects actual wear and tear of assets and is non-tax deductible. The tax base can be used for tax depreciation, which are defined in the Income Tax Act.
• Provisions – temporary diminution in the value of assets is expressed through provisions whose creation is based on the principle of prudence. In particular, accounting provisions for bad debts are created.
• Prepayment, accruals, reserves - accounting for these items meets the accrual principle of accounting. We charge costs and revenues to the period to which they relate materially and in time.
• Exchange rate differences - assets and liabilities denominated in foreign currencies are translated to Czech crowns at the balance sheet date using the exchange rate announced by the Czech National Bank for the given day, or the last known day if that day falls on a public holiday.
• Profit / loss in the approval process - at the balance sheet date, an account must be settled in retained earnings, unpaid losses or otherwise. The General Meeting decides how to deal with it during the current period of the year.
• Deferred tax - an accounting tool used to capture the principle of fair and fair presentation of facts in accounting. Deferred tax liabilities are incurred by entities that make up the consolidated group and entities that prepare the financial statements in full. Other units report it and account for it voluntarily.
• Income tax payables - entities report a tax due as at the balance sheet date. The amount should agree to the tax liability in the corporate income tax return. If its actual amount is not known at the balance sheet date, an entity may calculate a provision for income tax that is recognized in the balance sheet in the same way as the actual income tax liability deducted by paid advances for income tax during accounting period.

As can be seen above, the closing operations are numerous and nothing should be forgotten. If you need assistance in this matter, we are fully at your disposal.