Year End Financial Statements: Year End Financial Reports and the End of Year Close Checklist

What goes into a year end financial statement package

Four documents, in a fixed order, because each one depends on the one before it. The income statement covers the twelve months of the fiscal year and produces net income. The statement of retained earnings or changes in equity takes that net income, adds it to the opening balance, subtracts distributions and lands on closing equity. The balance sheet uses that closing equity figure and reports assets, liabilities and equity as of the last day of the year. The statement of cash flows explains how the cash balance on that balance sheet got there. If you have ever wondered why the sequence matters, our note on the order financial statements are prepared in walks through it. The build itself, statement by statement, is in our guide to how to prepare financial statements.

Two more things belong in the pack even though they are not statements. The first is a comparative column: last year beside this year, on every statement. A single year of numbers tells a reader almost nothing, and every external party you hand the pack to, lender, buyer, board, will ask for the prior year within about a minute of opening it. The second is notes, even informal ones, covering accounting basis, significant estimates, related-party balances and any debt terms. A small company does not need full GAAP footnotes, but a page of context prevents most of the follow-up questions.

What year end statements are not is a tax return. The return is prepared from the statements and then diverges, because tax treatment of depreciation, meals, accruals and owner compensation differs from book treatment. Keep the book set clean and let your preparer make the tax adjustments on their side. A company that edits its books to match last year's return usually ends up unable to explain either one.

The year end close, and what it adds on top of a normal month

Everything in a monthly close still applies: reconcile every bank and credit card account to the statement, clear undeposited funds, review the receivable and payable agings, and confirm no transactions are dated into a closed period. The full sequence is on our month end close checklist. Year end then adds the work that only happens once.

Depreciation and amortization for the year get booked, and the fixed asset schedule gets reconciled to the balance sheet, including anything disposed of during the year that is still sitting on the books. Prepaid expenses and deferred revenue get trued up to what is actually unexpired or unearned at the balance sheet date. Inventory gets counted, and the count, not the perpetual balance, becomes the number on the balance sheet. Accrued payroll, bonuses, vacation and interest get recorded for work performed and time elapsed before the cutoff, whether or not anything was paid. Loan balances get agreed to the lender's year-end statement, with the current and long-term portions split correctly, which is one of the most common presentation errors in small-company balance sheets.

Then the compliance layer. Contractor payments get reviewed against the 1099-NEC threshold and W-9s chased before the January 31 filing date, which is the same deadline as W-2s. Owner draws and distributions get reclassified out of expense accounts, where they somehow always end up. Sales tax and payroll tax liabilities get agreed to the returns filed. Finally, the books get locked with a closing date and a password, and the trial balance gets exported and archived, because the version of the numbers you handed to the bank in March should still be reproducible in September.

Year end financial statements in QuickBooks, and where they fall short

QuickBooks will produce a Profit and Loss and a Balance Sheet for the fiscal year, and with the comparison option turned on it will add a prior-year column. That gets you most of the way. Three gaps show up when the pack leaves your desk.

The statement of cash flows is the first. QuickBooks builds it from account types rather than from how you actually use each account, so a line of credit drawn and repaid during the year commonly lands in operating activities instead of financing, loan principal payments get mixed with interest, and depreciation sometimes fails to appear as an add-back at all. The result is an operating cash flow figure that a lender will not accept. We covered the mechanics in the indirect method in QuickBooks and the fixes on our QuickBooks cash flow statement page.

The second gap is retained earnings. QuickBooks rolls net income into Retained Earnings automatically at year end without a journal entry, so the account has no transactions of its own and any prior-period change silently restates it. If your retained earnings balance does not agree to last year's issued statements, the cause is almost always a transaction dated into the closed year, and the diagnosis is in why QuickBooks retained earnings is incorrect. The third gap is presentation: the default reports come out in chart-of-accounts order with every account on its own line, rather than grouped and subtotalled the way an external reader expects.

AIStatements takes the export and fixes all three. Accounts get grouped and subtotalled into a conventional statement presentation, the cash flow statement gets built from actual account behavior rather than account type, comparatives sit beside the current year, and the three statements are checked against each other before you see them. What you get back is a pack you can send out, plus a written read of the ratios and what moved. Details of the workflow are on financial statement preparation software, and the QuickBooks-specific version on QuickBooks financial statements.

Who reads your year end pack, and what each one looks at first

Your tax preparer opens the trial balance and the balance sheet, because the return starts there and every hour they spend fixing your presentation is billed to you. A bank tests covenants, usually a debt service coverage ratio and sometimes a minimum current ratio or maximum leverage, and needs the statements in a form where those ratios can be computed without argument. A prospective buyer or investor reads three years side by side and looks for consistency more than for performance, since numbers that were presented differently each year raise a question about all of them. A board or an outside owner reads the cash flow statement first, because that is where the difference between reported profit and the money actually in the account gets explained.

Getting the pack out early matters more than most owners expect. Statements finished in February give you time to react to what they say; statements finished in July are a historical document. If yours are consistently late, the fix is usually a disciplined monthly close rather than a heroic annual one, which is what our month end close software page is about. AIStatements is software that formats and analyzes the data you provide. It is not accounting, audit or tax advice, it is not a CPA, and it does not guarantee GAAP compliance.

Common questions