Financial Year End
Financial Year End, What is it?
Firstly let’s distinguish between Calendar year and Financial year. A Calendar year is fixed and always runs from January to December. A Financial year, although normally also 12 months, does not necessarily run from January to December. In fact the vast majority of businesses in South Africa have their financial year end at the end of February which coincides with the Tax year, but depending on the various reasons, often based on trading season, many businesses choose to end their financial year more or less any time of the year.
So what is important about a financial year? Most businesses measure their progress year on year. This does not mean that measuring progress month on month should be neglected, because if you don’t monitor your business monthly, then there is a very strong chance that your financial year end will not pan out the way you might expected.
There are three more major reasons why your financial year, and therefore year end results should be accurately represented. The first is your tax liabilities. Your final tax liabilities are based on the final outcome of your financial year’s trading and profit. The second reason is that many lending institutes (banks) require copies of your latest and/or recent Annual Financial Statements (AFS), since the general health of the business has a bearing on the lenders’ risks and exposures. And the third reason is to ensure, according to your latest annual financial statements, that the business is indeed solvent, and if not, then the business could be deemed to be trading recklessly, with the possibility of serious legal consequences. These consequences are outside of the scope of this article, but suffice it to say the every business owner should be very mindful of possible consequences of trading when in an insolvent state.
So what is involved at a financial year end? Essentially a financial year end, as represented in the Annual Financial Statements (AFS), needs to be true reflection of the financial status of the business as at the last day of the of the financial year. Typically the key items that need to be reconciled and considered “correct” are:
All your customer (debtor) balances are correct and correctly aged, and representative, so consideration needs to be given to possible bad debts etc. It is also vital that the total outstanding, as per your age analysis, balances to your debtors control account in your general ledger.
Similarly the same reconciliation process need to take place with your
- Suppliers (creditors)
- Bank Accounts,
- Stock on hand
- Fixed Assets and the accumulated depreciation thereof
- Profit & Loss
- Balance sheet
- Shareholders loan accounts
- The list goes on.
And as mentioned above, the business’s financial statements (AFSs) must be a fair representation of the state of your business as well as how the business traded in the past financial year.
All such reconciliations unfortunately take time and cannot be concluded before the next trading day, being the first day on the new financial year. In fact preparing the final annual financial statements often take several weeks and even months, and usually require input from the appointed external financial officer.
So how does a business go about processing normal day to day trading transactions in the meantime, particularly if a business is using a “computerised” accounting system? It is important that a business selects an accounting system that accommodates “multi period” processing. This effectively allows a business to continue processing day to day trading transactions in the new financial year, whilst at the same time allowing users to back date transactions into the previous year as “corrective” entries.
It is also important that the accounting system automatically carries over the correct “opening” balances into the new financial year. In addition, that the accounting system has “permission setting” defining who is allowed to process into which period. Such permissions prevent unauthorised users from processing transactions into prior periods (years).
The accounting system should also have a “complete lock down” feature, which should be invoked once all prior period (year) corrective entries have been posted and balanced to the final annual financial statements (AFS), as drawn up by the external financial officer, copies of which are submitted to various statutory bodies (SARS) and lending institutes (Banks). It is important to lock down the prior year in question at this point in order to ensure that the accounting system continues to reflect the same balances (closing and opening) balances as agreed upon. Failing to do so could result in a mismatch going forward, necessitating unnecessary and costly audit investigations.
Omni Accounts offers multi period (year) processing, with the relevant permissions as well as period and year “lock downs.
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