3.2.1: Accounting Year-end

Choosing the fiscal year-end date is a strategic activity that requires careful consideration because the decision made can result in operational and tax advantages. The year-end will likely be influenced most by the company's business cycle. For example, a retailer will likely choose a year-end at the end of its busiest season, when inventory is at its lowest levels. This makes the physical count easier and less costly, because there will be more staff available and fewer adjustments to make before the books are closed. Planning a fiscal year-end based on advantageous tax consequences can be tricky, but essentially it means choosing a year-end that results in some temporary differences between certain transactions accounted for in one fiscal year but not taxed until a subsequent fiscal year. Alternatively, businesses that are not incorporated (e.g., proprietorships and partnerships) may choose the calendar year-end to coincide with Canada Revenue Agency, for simplicity from a tax perspective. Whatever fiscal year-end is chosen, accounting standards require that the financial statements be accrual based. This relates back to the accounting principles of revenue recognition, in terms of when to record revenue, and the matching principle, to ensure that all expenses related to that revenue recorded are included. The statements are also the results of operations for a specified period of time (the periodicity principle), called the reporting period. This raises the issues of what, when, and how much detail to record for any transactions that occur near, at, or subsequent to the reporting period year-end date.

Financial statements are often done on an interim basis each year. Interim reports can be monthly, quarterly, or some other reporting period. For example, public companies in Canada are required to produce quarterly financial statements. The accounting cycle has not yet been completed, so the temporary revenue, expense, gains, and loss accounts are not closed, and several end-of-period adjusting entries are recorded in order to ensure that the accounting records are as complete as possible for the interim period being reported. The annual published financial statements usually cover a fiscal or calendar year (on rare occasions, an operating cycle, if longer than one year). After the release of the year-end financial statement, the temporary accounts are closed to retained earnings, and an updated post-closing trial balance for all the (permanent) balance sheet accounts is completed to commence the new fiscal year.

There is also a period of time after the year-end date when certain events or transactions detected in the new fiscal year may need to either be recorded and reported in the financial statements or disclosed in the notes to the financial statements. For this reason, the accounting records from the previous fiscal year are kept open to accrue any significant entries and adjustments found in the new year that pertain to the fiscal year just ended. This time period may be anywhere from a few days to several weeks or months, depending on the size of the company. The end of this time marks the point at which the temporary accounts for the old fiscal year are closed and the financial statements are completed and officially published.

The following are examples of these types of transactions.

• Inventory – the physical inventory count that takes place as soon after the year-end date as possible. The total amount from the physical count is compared to the ending balance in the inventory subledgers, and an adjusting entry recorded for the difference. Since the accounting standards state that inventory is to be valuated each reporting date at the lower of cost and net realizable value (LCNRV), a write-down of inventory due to shrinkage may be required.
• Invoices Received after Year-end – this relates to goods and services received from suppliers before the year-end date, but not yet recorded. For example, companies purchasing goods from a supplier close to the year-end date usually receive the goods with a packing slip that details the types and quantities of goods received as well as the total cost. Once the goods are received and verified, the entry to record the goods and recognize the accounts payable will occur with the packing slip and the company's own purchase order being the source documents for the accounting entry. Recording entries relating to purchasing services, on the other hand, can be tricky since there is no packing slip involved when purchasing services. If the supplier providing the services does not leave an invoice with the purchaser as soon as the services have been completed, it will be sent at some later date, usually sometime during the following month of the new fiscal year. Keeping the books open for a time after the year-end date allows the company extra time to catch and record any significant transactions that are discovered during the next fiscal year that might otherwise be missed.

Any significant subsequent event that occurs after the fiscal year-end should be disclosed in the notes to the financial statements for the year just ended. An example might be where early in 2021 vandals damage some buildings and equipment. If the repair or replacement costs are material, these costs, though correctly paid and recorded in 2021, should be disclosed in the financial statements of 2020 if not yet published. This will ensure that the company stakeholders have access to all the relevant information.