Account closing process

Introduction

The closing of the financial year is approaching and with it, the moment of truth: we have to determine the result, profit or loss, obtained over the last twelve months of corporate wealth management.

What do we have to do to calculate the result? How can we differentiate what we have obtained during these months from what we obtained in the previous twelve?

To answer these questions and other similar ones, there is the accounting kept by the company from its constitution to the present moment.

In the accounting records (Daily Book and General Ledger), through the application of various valuation and temporary allocation rules (imposed by accounting legislation, whose central rule is the General Accounting Plan, PGC) have been collected, all the events with economic impact (economic events) that have quantitatively or qualitatively modified the assets of the company.

But how can we determine the periodic result from the accounting records? Through a set of processes grouped under the common name of account closure.

Processes

The closing of accounts is made up of the following processes:

1. Review of accounting records:

Detection and correction of errors Detection and recording of economic events pending formalization Reclassification of economic events based on their expiration date.

2. Periodification.

3. Determination and registration of amortizations.

4. Determination and registration of provisions.

5. Reconciliation of accounting balances and inventory values.

6. Determination of the result before taxes.

7. Determination and registration of corporate tax.

8. Determination and recording of the result after taxes.

First process: Review of accounting records

Error detection and correction

Throughout the financial year, those responsible for collecting and recording the economic events (administrative and accounting) that have occurred may commit involuntary errors when recording them. These errors can be quantitative: accounting entries with wrong values; or qualitative: accounting entries in wrong items (accounts).

Through this process, errors are detected and corrected by making the corresponding rectification entries: cancellation entries, complementary entries, etc.

Non-formalized operations

On the closing date of the financial year, which may or may not coincide with December 31 of each year, there are usually economic events (operations) that are not fully documented, for example: purchases entered into the warehouse, but of which not invoices have been received or, if they have been received, they have not been approved; sales delivered to customers without being invoiced or pending approval by them.

Reclassifications

The PGC establishes that certain investment and / or financing operations of the company that originally had a maturity or accrual (moment in which the right to collection or the payment obligation arises) in the long term (beyond the date of close of the financial year) must be recorded as short-term operations for the part of the total amount whose maturity or accrual occurs during the financial year.

The items or accounts that include the operations from which these reclassifications will be derived are the following:

- Accounts representing financing operations or other long-term debts contracted by the company:

Borrowings and other similar issues. Long-term debts with group companies and associates. Long-term debts for loans received and other items. Long-term guarantees and deposits received.

- Accounts representing investment operations or other long-term credits granted by the company:

Financial investments in group companies and associates Other permanent financial investments Guarantees and deposits established in the long term Provisions of fixed assets.

Second process: Periodification

Obviously, the life of the company extends from its start-up to the moment of its disappearance on a continuous basis. Thus, the true result would be obtained by valuing the company at the time of its closing (final value)) and comparing said value with the one corresponding to the moment of its start-up (initial value).

To obtain both values, the assets would be added: goods and rights; and debts with third parties would be subtracted; corresponding to the initial and final moment, respectively.

The difference between the two values, the initial and the final, would constitute the profit (if the final value was greater than the initial value) or the loss (in the case of being the final value less than the initial value) obtained by the company in the development of its activity.

However, neither the shareholders nor the State nor the third parties interested in the operation of the company are willing to wait for its disappearance to take place to recover part of their investment (shareholders), collect the taxes accrued (State) or know the situation of the company (interested third parties).

That is why the life of the company is artificially divided into a succession of financial years, which are given a duration equivalent to twelve calendar months. It is for this reason that we speak of the periodic result to differentiate it from the total result obtained by the company.

Thus, the allocation or allocation of income and expenses that correspond to each financial year and that will serve to determine the periodic result is called accrual.

For these purposes, the PGC provides for the use of the following accounts:

Anticipated spendings

Non-financial expenses that have been paid during the year ending, but whose accrual or maturity corresponds to the following year are recorded in this account.

For example: suppose that the company has rented a warehouse to use it as a warehouse and that it pays the rent for anticipated non-natural quarters, being the payment dates between the 1st and 5th of the months of February, May, August and November every year.

Of the payment made in November 2000, two-thirds correspond to the fiscal year ending on December 31. However, the remaining third corresponds to the financial year that will begin on January 1, 2001.

Thus, by accruing the amount of the rent of the warehouse corresponding to the month of January of the year 2001, which will have been paid during the month of November of the year 2000, it will be charged to the result of the year 2001.

Anticipated income

Non-financial income that has been collected during the year ending, but whose accrual or maturity corresponds to the following year are recorded in this account.

For example: suppose that the company provides the service of repair and maintenance of machinery and that it charges its clients for anticipated non-natural quarters, the collection dates being between the 21st and the 25th of the months of February, May, August and November of each year.

Of the collection made in November 2000, one third corresponds to the fiscal year that will end on December 31. For its part, the remaining two-thirds correspond to the financial year that will begin on January 1, 2001.

Thus, by accruing the amount of the machinery repair and maintenance service corresponding to the months of January and February of the year 2001, which will have been collected during the month of November of the year 2000, will be charged to the result of the year 2001.

Interest paid in advance

This account records financial expenses (interest on loans received by the company) that have been paid during the fiscal year that is ending, but whose accrual or maturity corresponds to the following fiscal year.

For example: suppose that the company has granted a mortgage loan to expand its industrial facilities and that it pays interest for anticipated non-natural quarters, the payment dates being between the 1st and 5th of the months of March, June, September and December of each year.

Of the interest paid during the month of December 2000, one third correspond to the fiscal year that will end on December 31. While the remaining two-thirds correspond to the financial year that will begin on January 1, 2001.

Thus, by accruing the amount of mortgage interest corresponding to the months of January and February of the year 2001, which will have been paid during the month of December of the year 2000, it will be charged to the result of the year 2001.

Interest cobrados for anticipantin

In this account, income of a financial nature (interest on loans granted by the company or on bank deposits from the company) that has been collected during the year ending, but whose accrual or maturity corresponds to the following year, are recorded in this account.

For example: suppose that the company has a bank checking account and that it charges interest for non-calendar quarters past due, the collection dates being between the 1st and 5th of the months of March, June, September and December of each year.. Of the interest collected during the month of December 2000, one third corresponds to the fiscal year that will end on December 31.

While the remaining two-thirds correspond to the financial year that will begin on January 1, 2001.

Thus, by accruing the amount of interest accrued by the current account corresponding to the months of January and February of the year 2001, which will have been paid during the month of December of the year 2000, it will be charged to the result of the year 2001.

In addition to those previously mentioned, there are other non-specific accounts that at the end of the fiscal year can collect or record annotations derived from the accrual process. For example:

Deferred interest income Provision for pensions and similar obligations Provision for taxes Provision for traffic bad debts, etc.

Third process: Amortization

Amortization is the process by which the value of the tangible and intangible assets applied by the company to achieve its objectives is incorporated into the cost price of the products manufactured or the services provided, in order to recover said value and allow the replacement of the aforementioned elements when they reach the end of their useful, technical or economic life.

The processes that make up the accounting close of the financial year include the calculation and recording of the periodic amortization installments corresponding to the year that is closed.

Regarding the calculation, it will be as provided in the accounting standards, mainly the PGC, existing in this regard. Always regardless of what the tax regulations establish. Inasmuch as the accounting regulations are in no case subject to the tax, nor vice versa.

Similarly, the periodic amortization installments will be recorded in the accounts provided for that purpose by the PGC. That is to say:

Accumulated depreciation of intangible assets Accumulated depreciation of property, plant and equipment.

Fourth process: Provision of expenses and losses

Through provisions, the company records in advance those expenses or losses of which the amount is known, but the exact moment in which they will take place is unknown. The fact that registration occurs in advance obeys the principle of prudence, according to which expenses and losses must be accounted for when they are known to exist, while income and profits can only be accounted for when they have actually occurred..

The processes that make up the accounting close of the financial year include the calculation and recording of the provisions corresponding to the year ending.

Similarly, provisions will be recorded in the accounts provided for that purpose by the PGC, classified by the nature of the expenses or losses recorded. For example:

For risks and expenses:

Provision for pensions and similar obligations.

Provision for taxes, etc.

Of immobilized:

Provision for depreciation of intangible assets.

292. Provision for depreciation of property, plant and equipment, etc.

Stock:

Provision for depreciation of merchandise.

Provision for depreciation of raw materials, etc.

For traffic operations:

Provision for traffic insolvencies, etc.

Financial:

Provision for depreciation of short-term marketable securities of group companies, etc.

Fifth process: Reconciliation of balances

At this time we will proceed to the reconciliation of the balances of customers, suppliers, banks and stocks. Reconciliation consists of comparing the accounting balances (those deducted from the accounting records kept by the company) with the actual balances and, where appropriate, correcting any differences that may exist.

The actual balances will be obtained in different ways depending on the nature of the items or accounts to be reconciled. Namely:

Clients: it will be circulated (sending confirmation letters) to clients requesting that they confirm the balance of their operations with the company at the closing date of the financial year. Generally, confirmation is requested only from customers whose volume of operations during the year has exceeded a previously determined amount. For example: it can be decided that this amount is equal to 1% of total sales (excluding indirect taxes). Providers: it will be circulated (sending confirmation letters) to suppliers requesting that they confirm the balance of their operations with the company on the closing date of the financial year. Generally, confirmation is requested only from suppliers whose volume of operations during the year has exceeded a previously determined amount. For example: it can be decided that this amount is equivalent to 1% of total purchases (excluding indirect taxes). Banks: Extracts will be requested as of the closing date of the fiscal year of current accounts, time deposits, credit policies (credit used), loans (amount pending repayment) and any other operations or formalized deposits with financial institutions (banks and savings banks).Inventories: the physical inventory or count of the inventories of raw materials, auxiliary materials, products in progress, finished products, merchandise, etc., that are owned by the company will be carried out on the closing date of the financial year.

Once the actual balances are known and the comparison with the accounting balances has been made, the accounting records will be adjusted by means of the pertinent annotations.

Sixth process: Result before taxes

At this point we are in a position to proceed to determine the result before imputing the Corporation Tax.

For this, it will be enough that we charge (any entry made in the debit of an account is called a charge) to account 129. Gains and Losses the balances of all purchase and expense accounts and that we pay (any entry made in the credit is called a credit account) to the same account 129. The balances of all sales and income accounts.

In this way, all expense accounts and all income accounts will be settled and closed, that is to say, your balance will be equal to zero.

For its part, account 129. Profit and Loss will present:

Debt balance or loss, if the sum of the expenses is greater than the income.Creditor balance or profit, if the sum of the income is greater than that of the expenses.

Seventh process: Corporation Tax

The balance of the account 129. Profit and Loss will represent, after what is stated in the previous section, the accounting result obtained by the company throughout the fiscal year that is closed without taking into account the expense derived from the Corporation Tax accrued on said result..

Thus, in the event that the company has obtained a positive result or profit, the accrued share of Corporation Tax will be determined, considered as an expense for the fiscal year that is closed, applying the tax criteria in terms of bonuses to the accounting result, deductions and tax rate.

This fee, which we insist is considered an expense for economic purposes, although it is not a deductible expense from a tax perspective, will be recorded in account 630. Income tax through the corresponding charge.

If, on the contrary, the company has obtained a negative result or loss, the accrued share of the Corporation Tax will be determined, considered as a tax credit for the following financial years, applying the tax criteria in terms of bonuses, deductions and tax rate to the accounting result..

This fee, which we insist is considered a tax credit for economic purposes and that it may have the same consideration from a tax perspective, will be recorded in account 630. Income tax through the corresponding credit.

Regarding the accounting implications of the calculation and registration of Corporation Tax, we recommend reading the article "Counting accounts in Corporation Tax" appeared in number XIV (pages 38 to 43) of the magazine "El Fisco" from 1 to 15 of June.

Eighth process: Result after taxes

Finally, we arrive at the determination of the result after taxes by means of the corresponding charge or credit of the balance of account 630.

Tax on profits to the account 129. Profit and Loss.

There will be a charge if the result before taxes was positive and, therefore, the balance of account 630. It represented the expense derived from the Corporation Tax.

On the contrary, a credit will be produced if the result before taxes was negative and, therefore, the balance of account 630. It represented the tax credit derived from the Corporation Tax.

Closing of accounts

Once the processes described above have been completed and the accounting result after taxes having been determined and recorded, we can consider the financial year definitively closed.

However, for accounting purposes, the closing of all the so-called balance sheet accounts (accounts included in groups 1 to 5, both included, of the PGC) would still be pending.

To do this, we will proceed to pay all the asset accounts by their balance (all those accounts that at the end of the year present a debit balance are called assets, that is, those in which the sum of all the entries made in the debit is greater than the sum of all the annotations made to the credit) and also charge for their balance all the liability accounts (all those accounts that at the end of the year present a credit balance are called, that is, those in which the sum of all the annotations made on the debit is less than the sum of all the annotations made on the credit).

In this way we have proceeded to close the accounting on the closing date of the financial year.