Year-end adjustments definition

Year-end adjustments are journal entries made to various general ledger accounts at the end of the fiscal year, to create a set of books that is in compliance with the applicable accounting framework. A number of year-end adjustments may be required, depending on how diligently the books have been maintained on a monthly basis. The number of these adjustments that are needed has a direct impact on the time required to close the books. An efficient company controller will probably try to minimize the number of year-end adjustments by avoiding making any entries pertaining to immaterial business transactions.

When to Use Year-End Adjustments

It is especially necessary to create year-end adjustments when the financial statements are to be audited by the company’s auditors. If these adjustments are not made prior to the start of the audit, it is likely that the auditors will present the company with a number of adjustments that they will insist on, or else they will not issue an unqualified audit report.

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Examples of Year-End Adjustments

Examples of the many types of year-end adjustments are as follows:

Accrual Year-End Adjustments

• Accrual of expenses for which supplier invoices have not yet been received. For example, an interest billing from the bank may arrive late, so the expense is accrued.
• Accrual of payroll expenses for hours worked that have not yet been paid. For example, wages are paid through the 28th day of a 30-day month, so the wage expense for the final two days must be accrued.
• Accrual of revenue that has been earned but not yet billed. For example, a contract mandates that billing can only occur at the completion of the underlying project, so revenues earned prior to that point must be accrued.

Inventory Year-End Adjustments

• A change in the valuation of the ending inventory balance, due to differences found between the inventory records and the actual unit quantities from a year-end physical count.

Depreciation and Amortization Year-End Adjustments

• Depreciation and amortization charges on fixed assets. Some smaller businesses do not bother to recognize depreciation and amortization on a monthly basis, choosing to instead do so just once, at the end of the year.

Reconciliation Year-End Adjustments

• Adjustments to general ledger accounts that have been reconciled as part of the closing process. For example, a review of the prepaid expenses account reveals that several items should have been charged to expense in prior months, so these items are charged off at year-end.

Reclassification Year-End Adjustments

• Reclassification of transactions from one account to another. For example, a portion of the amount due under a long-term debt arrangement is reclassified as being a short-term debt, since it is due and payable within one year.

Auditor Year-End Adjustments

• Adjustments based on issues found by the outside auditors. For example, the auditors find that the ending inventory is overstated by $10,000, and require that a year-end adjustment be made to correct the situation.