Performing a Year-end Close with QuickBooks

Adjusting Year-end Balances
When closing the books at the end of a client's fiscal year, bookkeepers should perform many of the same procedures for monthly reviews (such as reconciling bank statements and credit card statements and transferring uncategorized income and expense balances). In addition, bookkeepers should perform the following procedures when adjusting QuickBooks files at the end of a client's fiscal year:

• Adjust Inventory. Bookkeepers should adjust inventory quantities in QuickBooks to agree to physical inventory counts. In addition, bookkeepers should adjust the balance in the "Inventory Asset" account to lower of cost or market if necessary.

• Adjust the Allowance for Doubtful Accounts. QuickBooks instructs users to record bad debt expense by (a) selecting "Receive Payments" from the "Customers" menu, (b) selecting the customer's name from the drop-down list in the "Received From" field of the "Receive Payments" window, (c) leaving the amount field at 0.00, (d) highlighting the uncollectible outstanding invoice or statement charge, (e) clicking the "Discounts & Credits" button, (f) entering the bad debt amount in the "Amount of Discount" field in the "Discount and Credits" window, and (g) selecting the "Bad Debt Expense" account from the "Discount Account" drop-down list. That procedure debits "Bad Debt Expense" and credits "Accounts Receivable." (That procedure also adjusts the affected customer invoice or statement but does not adjust any sales tax liability related to the uncollectible receivable.) Since GAAP financial statements should be prepared using the allowance method of accounting for bad debts, the direct charge-off method recommended by QuickBooks only should be used if it does not result in a material difference from the allowance method.

Under the allowance method, receivables that have not been specifically identified as uncollectible but that are estimated to be uncollectible should be reserved using an allowance for doubtful accounts. Bookkeepers often estimate uncollectible accounts using (a) the percentage of sales method, (b) the aging method, or (c) a weighted average method. Any receivables subsequently identified as uncollectible should be written off against the allowance for doubtful accounts. At the end of the client's fiscal year, the bookkeeper should (a) compute bad debt expense, accounts receivable, and allowance for doubtful accounts balances using the allowance method; (b) review the client's postings to the "Bad Debt Expense" account using the direct charge-off method; and (c) compare the results. If necessary, the bookkeeper should record a journal entry to adjust the "Bad Debt Expense," "Allowance for Doubtful Accounts," and "Accounts Receivable" accounts.

Note: Bookkeepers cannot record a journal entry that debits "Allowance for Doubtful Accounts" and credits "Accounts Receivable" if the allowance account has been set up as a subaccount of "Accounts Receivable." QuickBooks does not allow users to post transactions to multiple accounts receivable accounts in the same journal entry. Recording a journal entry to credit "Accounts Receivable" adjusts a particular customer's balance but does not adjust the affected customer invoice or statement.

• Adjust Gains or Losses on Fixed Asset Sales. Bookkeepers should verify that fixed asset sales are recorded correctly. Many clients erroneously credit a fixed asset gain/loss account or miscellaneous income account for the entire amount of the sales proceeds when recording a fixed asset sale. In that case, the bookkeeper should record a journal entry to (a) credit the fixed asset's original cost, (b) debit accumulated depreciation, and (c) debit or credit the gain/loss account.

• Capitalize and Amortize Prepaid Assets. Clients often pay certain expenditures in advance, such as property and casualty insurance, property taxes, and advertising. Expenditures that benefit more than one year should be recorded as prepaid assets when paid and amortized over the appropriate period covered by the expenditure. Clients often record such disbursements as expenses when paid. If material, bookkeepers should capitalize prepaid assets by recording a journal entry that debits a prepaid assets account and credits the applicable expense accounts. In addition, bookkeepers should amortize prepaid assets by recording a journal entry that debits the applicable expense accounts and credits the prepaid assets account.

• Calculate and Record Depreciation. Bookkeepers should calculate and record depreciation on fixed assets.

• Record Interest Expense. Bookkeepers should record interest expense on loans and notes payable.

• Adjust Marketable Securities to Fair Value. Generally accepted accounting principles require marketable debt and equity securities to be recorded at fair value if they are available for sale or held for trading purposes. Consequently, bookkeepers should determine the fair value of such securities as of the client's balance sheet date and record a journal entry to adjust the value of the securities. The journal entry should debit or credit the investment asset account for the increase or decrease in value. For available-for-sale securities, the offsetting amount should be recorded in other comprehensive income (unless a decline in value is considered to be other than temporary, in which case the offsetting amount should be recorded in current period income or expense). For trading securities, the offsetting amount should be recorded in current period income or expense. As a practical matter, bookkeepers for most small to medium-sized companies only adjust marketable debt or equity securities to fair value at year-end. Adjustments generally are not made during interim periods unless significant changes in fair value occur.

• Adjust Uncategorized Income and Expenses. Bookkeepers should transfer amounts from the "Uncategorized Income" and "Uncategorized Expenses" accounts to the appropriate general ledger accounts.

• Adjust Opening Balance Equity. Bookkeepers should transfer the balance in the "Opening Balance Equity" account to the applicable equity accounts.

The preceding items represent the most common journal entries that bookkeepers generally need to record at year-end for their QuickBooks clients. However, bookkeepers should review other general ledger accounts as discussed beginning in NACPBs QuickBooks Year-end Procedures Guide and perform detail account analysis as discussed in the Guide.

Automatic Year-end Adjustments
QuickBooks automatically records certain year-end adjustments based on the month specified in the "First month in your fiscal year" field in the "Company Information" window. (Bookkeepers can verify that the correct month is specified in that window by selecting "Company Information" from the "Company" menu.) On the first day of the new fiscal year, QuickBooks:

• Zeroes out all income and expense accounts so that the new fiscal year begins with zero net income.
• Posts all income and expense balances to the "Retained Earnings" account (which QuickBooks automatically creates during the setup of the company).

Since QuickBooks does not record the preceding adjustments until the first day of the client's new fiscal year, the adjustments do not affect account balances in the preceding fiscal year. As bookkeepers continue to adjust the client's QuickBooks file for the preceding fiscal year, QuickBooks continues to post all income and expense transactions recorded with a date in the preceding fiscal year to retained earnings in the new fiscal year. Although the QuickBooks adjustments do not affect the ending retained earnings balance for the year being closed, they affect the beginning retained earnings balance for the subsequent fiscal year. Consequently, bookkeepers should review the beginning retained earnings balance in QuickBooks to verify that it agrees to the ending retained earnings balance from the prior fiscal year. In addition, bookkeepers may need to transfer the balance in the retained earnings account to a more appropriate equity account (such as proprietor's capital or partners' capital) if the client is not a corporation. The discussion beginning in the following paragraph provides additional guidance on adjusting retained earnings in QuickBooks.

Retained Earnings
Bookkeepers may need to adjust the balance in the "Retained Earnings" account for a number of reasons. For example:

• Clients may have posted transactions to a prior fiscal year erroneously. (See further discussion beginning in NACPBs QuickBooks Year-end Procedures Guide.) Consequently, the beginning retained earnings balance in QuickBooks may not agree to the ending retained earnings balance from the prior closed fiscal year.
• The prior year income and expense balances that QuickBooks automatically posts to the "Retained Earnings" account may need to be transferred to another equity account. The discussion in paragraph NACPBs QuickBooks Year-end Procedures Guide provides further guidance on other equity accounts.

Bookkeepers can determine whether the balance in the "Retained Earnings" account needs to be adjusted by generating the "Balance Sheet" and "Profit & Loss" reports in QuickBooks. The "Balance Sheet" and "Profit & Loss" reports are discussed in more detail in NACPBs QuickBooks Year-end Procedures Guide. Those reports can be generated by selecting "Company & Financial" from the "Reports" menu. The "Balance Sheet" report should be generated as of the first day of the client's current fiscal year. The "Profit & Loss" report should be generated for the period from the QuickBooks start date to the last day of the client's preceding fiscal year. The "Retained Earnings" balance on the "Balance Sheet" report should equal the "Net Income" amount on the cumulative "Profit & Loss" report. If the amounts do not match, bookkeepers should verify that the difference results from transferring amounts from the "Retained Earnings" account to other equity accounts (as discussed in NACPBs QuickBooks Year-end Procedures Guide.) Bookkeepers can generate a report to review adjustments to the "Retained Earnings" account by selecting "Accountant & Taxes" and then "Transaction List by Date" from the "Reports" menu. That report should be generated for the same time period as the "Profit & Loss" report (i.e., from the QuickBooks start date to the last day of the client's preceding fiscal year). Bookkeepers also should filter the report by clicking the "Modify Report" button and the "Filter" tab. Select "Account" from the "Filter" drop-down list, select "Multiple accounts" from the "Account" drop-down list, and then select "Retained Earnings."

Bookkeepers can adjust the balance in the "Retained Earnings" account by recording a journal entry or posting a transaction to the account register of another affected equity account. QuickBooks does not provide an account register for the "Retained Earnings" account since it is a special automatically created account that QuickBooks uses only for report purposes. As discussed in NACPBs QuickBooks Year-end Procedures Guide, QuickBooks posts all income and expense transactions recorded with a date in a previous fiscal year to retained earnings in the current fiscal year. Although the QuickBooks adjustments do not affect the ending retained earnings balance for a closed year, they affect the beginning retained earnings balance for the current fiscal year. QuickBooks users can view postings (both automatic closing entries and manual entries) to the "Retained Earnings" account by using the "QuickZoom" feature in reports or from the "Chart of Accounts" list. When users double-click on the "Retained Earnings" amount in a report, the "Transactions by Account" for the "Retained Earnings" account displays all transactions for the "Retained Earnings" account for the selected period. Alternatively, users can select "Chart of Accounts" from the "Lists" menu, highlight the "Retained Earnings" account, and select "QuickReport" from the "Reports" drop-down list. The QuickReport displays all transactions for the "Retained Earnings" account for the selected period.

For more information on QuickBooks year-end procedures, refer to NACPBs QuickBooks Year-end Procedures Guide.