Preparing the annual financial statement - How to be perfectly prepared

Annual financial statements are purely routine work? No! It is true that all professionals have a perfect command of their accounting software and know all the legal provisions very well. Nevertheless, annual accounts can never be purely routine. Why not? Quite simply: because the data for accounting comes from people. From the salesperson. From the product manager. From the marketing manager. From the caretaker. - People who implement new ideas, face new challenges and use new suppliers, service providers and services every year.

The real challenge for the annual financial statement lies in the completeness and correctness of the entries. Here is a small guide to help you prepare the annual financial statement perfectly.

1 The hard facts first: cash flows and assets

The very first step is to take care of the "hard" data on the funds:

  • Where did how much money come in?
  • Where did how much money go?
  • What are the "real" assets (not book values)?

This information comes from account statements, securities lists and the inventory.

Before we even begin to think about depreciation, profits, losses, accruals, etc., we need to check that our accounting accounts match the "hard facts". This is the basis for everything else.

2 Claim and collect receipts

We all know: "No receipt, no entry". Often this is a human resource management issue - employees need to be encouraged to submit outstanding payment vouchers, expense claims and other submit relevant documents in due time. Here it is important to set clear deadlines and to demand confirmation from the departments that all receipts have been submitted. Of course, the receipts should be checked promptly. It is always annoying when you only notice weeks later that a payment voucher for 3,452 euros is not self-explanatory and the employee in question is on holiday...

3 Prepare depreciation (AfA)

Depreciation is a science in itself. There are not only a number of different depreciation methods, but also a colourful bouquet of rules and exceptions. Smart accountants therefore leave this discipline to their tax advisors. But beware: a smart depreciation policy requires accurate data! So make sure that all assets are documented in detail:

  • Procurement costs
  • Procurement date
  • Depreciation to date; current residual value
  • Current condition (damaged? worn?)

It is best to keep a central table that is linked to the original documents. (Tip: In Excel you can also insert links to local files).

4 Check own invoices (turnover)

Did you know that your own invoices are more often forgotten in accounting than supplier invoices? No joke. The reason is simple: if a supplier invoice is forgotten, a reminder flutters into the house. If your own dunning system does not work perfectly, receivables remain open longer than planned.

The following procedure has proved most successful:

  • Compilation of all invoices with a cut-off date of 31 December
  • Examination of the demands: Are adjustments still necessary? Examples: Subsequent price reductions, additional services to be charged, etc.
  • Give a list of invoices to those colleagues who write / send invoices for checking purposes.
  • Check incoming payments
  • If no debtors are posted: Enter open invoices with an accrual entry so that the payment can still be credited to the old business year.

5 Accruals and deferred income: ARAP and PRAP

In order for income and expenses to be allocated on an accrual basis, accruals and deferrals must be made:

  • Accrued income and prepaid expenses (ARAP): Expenses that have already been recognised in this year but relate to the following financial year.
  • Deferred income (PRAP): Revenue that has already been received and recognised but is attributable to the new financial year.

Do not forget: When the new financial year opens, these items must be posted back again.

6 Liabilities

The easiest to check are paid invoices: These are reliably documented in the bank accounts and only need to be reconciled with the accounting accounts.

The recording of outstanding liabilities (accrual accounting) is more tricky. Here, too, ask your colleagues. Who still has open invoices on the desk that relate to the old business year?

The most sensitive, however, are liabilities that have not yet been invoiced:

  • Contracts that have been signed but have not yet appeared in the accounts payable ledger
  • Suppliers who have not yet sent an invoice
  • Subscriptions billed once a year

Normally, such contracts are managed by the operational departments, not by the accounting department. Of course, we have to ask the departments to report in due time all liabilities received. It is also useful to check the last annual accounts in detail: Which recurring liabilities are recorded there? Do they still exist?

The following rule of thumb applies to the accounting of such liabilities:

  • If the amount and timing of the amount owed is known, the liability is recognised in accruals and deferrals.
  • If the amount and/or date of maturity are still unknown, the provision comes into play

7 Provisions

Accruals are fictitious expenses. They are booked to adjust the profit and loss account, i.e. to avoid overstating the profit.

Common topics for provisions are:

  • Liabilities incurred, the amount of which is still unknown
  • Litigation to be feared
  • Taxes payable abroad
  • Contractual penalties
  • Threat of sales slumps (example: Covid 19 pandemic)
  • Warranty provisions (covering customers' warranty claims)

Provisions should also ideally be made by the tax advisor. He knows best what is possible and permitted - and what is not.

What we can prepare, however, is an accurate list of possible provisions and documentation of the known facts:

  • Average expenses for warranty claims in recent years
  • Assessment provided by in-house counsel regarding threat of litigation

8 Review accruals and provisions of the last financial statements

After the annual financial statement is before the annual financial statement. Exactly one year ago, accruals and deferrals were already booked, provisions were formed and, if necessary, released again. In the current annual financial statement, one should take a close look at the beginning of the business year:

  • Were transitory entries posted back correctly?
  • Are all accruals and deferrals taken into account?
  • Do existing provisions have to be released or adjusted?
  • Warranty provisions (covering customers' warranty claims)

A tip at the end

With Contract Management Software ContractHero you can manage all contracts centrally. This way, you will never again miss liabilities that were entered into unnoticed by the accounting department in another department.

Sebastian Wengryn

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