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:
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.