Closing a month and a year

A closing routine

Closing a period is not an accounting event managers attend to. It is a short list of checks, done in order, that ends with a set of books you would be willing to hand to someone else.

1. Every bank line is coded. The waiting count on Bank & coding is zero.
2. The bank agrees. Reconcile to the statement's closing balance and date.
3. Outstanding items are current. Look at who owes you and who you owe. Anything long overdue is either a collection problem or a recording problem.
4. Prepayments and accruals are posted. Money paid in advance for a later period, and costs incurred but not yet invoiced.
5. Depreciation is posted. For each class of asset, the depreciable amount is allocated on a systematic basis over its useful life NZ IAS 16.50.
6. Provisions are reviewed. A provision is recognised where there is a present obligation from a past event, an outflow is probable, and the amount can be estimated reliably NZ IAS 37.14.
7. The GST period is filed and snapshotted.
8. The reports are reproduced. Run the assurance procedures and confirm that the figures on the reports can be recalculated from the rows.
9. The period is sealed. See chapter 14.
10. A backup is taken. Settings → Backups writes a copy of the whole set of books next to the database.

Inventories, if the business holds any

Inventories are measured at the lower of cost and net realisable value NZ IAS 2.9. Cost includes the costs of purchase, the costs of conversion and the other costs incurred in bringing the inventories to their present location and condition NZ IAS 2.10, and it is assigned using first-in, first-out or a weighted average NZ IAS 2.25.

Net realisable value is the estimated selling price less the estimated costs of completion and sale. Where cost is not recoverable — damaged stock, or stock whose selling price has fallen — the write-down is recognised as an expense in the period it happens NZ IAS 2.28.

The wholesaler simulation trades inventory, so this is where to practise it.

Leases, if the business rents premises or equipment

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration NZ IFRS 16.9. At the commencement date the lessee recognises a right-of-use asset and a lease liability NZ IFRS 16.22.

In plain words: a long lease is recognised in the balance sheet, not simply expensed as rent. Short-term and low-value leases have practical exemptions, which is why the rent line in a small business is a mix of both treatments.

Events after the reporting date

Work does not stop on balance date. The standard divides the time afterwards into two kinds of event, and the treatment differs:

• Adjusting events provide evidence of conditions that existed at the reporting date. The amounts in the financial statements are adjusted to reflect them NZ IAS 10.8. A customer who owed $40,000 going into liquidation shortly after balance date is the classic example: the customer was already in trouble at the date.
• Non-adjusting events concern conditions that arose after the reporting date. The amounts are not adjusted, but a material event may still need to be disclosed NZ IAS 10.10.

An auditor performs procedures designed to obtain sufficient appropriate audit evidence about events between the date of the financial statements and the date of the auditor's report ISA (NZ) 560.6. After the report is signed, the auditor has no obligation to keep looking — but if a fact comes to light before the statements are issued, the standard says what to do about it ISA (NZ) 560.10.

Going concern

One question sits underneath all of this. Are these financial statements prepared on the basis that the business will keep trading?

The objective of the auditor is to obtain sufficient appropriate audit evidence about, and conclude on, the appropriateness of management's use of the going concern basis of accounting ISA (NZ) 570.9. Where management has not yet made an assessment, the auditor asks them to make one ISA (NZ) 570.16.

For the person doing the books, the practical version is this: if the business cannot pay its debts as they fall due, the accounts look different, and the time to raise it is during the closing routine rather than after the statements are issued.