Processing End of Fiscal Year

In this article:

• Understanding what entries the system does automatically
• Understanding what entries the user enters manually 
• Closing a Period
• How to Close a Period
• Re-opening a Closed Period

This guide explains how to manage your financial periods in Legal Accounting.

At fiscal-year end, the general ledger for a sole proprietorship or partnership is closed in order to finalize the year’s performance, prepare for the new fiscal period, and enable proper allocation of profit or loss among owners/partners. In your system, much of the “close” work is automated, though the final equity allocation remains manual by design.

Understanding what entries the system does automatically

The following is a list of the actions the system will perform at the closing of a fiscal year:

• Aggregates all revenue and expense transactions for the fiscal year and computes the net result (net income or net loss).
• Resets the balances of all temporary (nominal) accounts — revenue accounts, expense accounts, and owner/partner withdrawals/drawings — to zero, so the new fiscal year begins with no leftover activity in those accounts.
• Posts the net income (or net loss) amount into a balance-sheet account labelled Income for Allocation.
• Ensures the opening balances for the new fiscal year reflect only the permanent accounts plus the yet-to-allocated income or loss.

Understanding what entries users manually make 

 The following is a list of actions and entries users will be required to make at year end:

• Review the “Income for Allocation” balance.
  • Determine how much of that net income (or loss) goes to each partner or to the sole proprietor’s capital account, based on the agreed share or arrangement.
• Create and post manual journal entries to move (allocate) appropriate parts of the “Income for Allocation” balance into the individual owners’ or partners’ equity (capital) accounts.
  • Each journal entry will debit the Income for Allocation account (to reduce it) and credit the relevant partner(s)' or owner’s capital account(s).
  • For losses, the reverse: you may need to debit the capital accounts and credit the Income for Allocation account, depending on how your chart of accounts is structured.
  • After allocation is complete, the “Income for Allocation” account should ideally be at zero (or at the correct residual if some portion remains undistributed), and partner/owner capital accounts will fully reflect the year's performance.
   
• Proceed into the new year, now with clean temporary accounts, updated capital balances, and a properly balanced trial balance.
  

Closing a Period

Closing a period is the final step in your financial workflow. This action finalizes your financial reports and starts the next accounting period.

 Before you close a period, make sure you have completed all of the following:

• All billing for the period is finished.
• All bank payments, transfers, and checks have been entered.
• All bill adjustments have been made.
• Operating and trust bank accounts have been reconciled.
• Your general ledger accounts have been reconciled.
• All additions and adjustments to journal entries have been entered.

How to Close a Period

1. Go to the Financials >Close Period tab.
2. In the Period to finalize section, set the End of Period date. The system will warn you that once the period is closed, you will be unable to make any changes that affect it.
   NOTE:  If you are also ending or closing a fiscal year, toggle on Close Fiscal Year option before you click Submit. This will net out your income and retained earnings accounts into equity.
3. Click Submit to start the process.
   

The Close Period function located under the Financials main menu is used to close the period and subsequently lock it so that no new entries can be made. It will then create all the necessary automatic adjusting entries as described above and will be shown as “Automatically created close period adjustments” on the general ledger reports in any g/l account that was affected. If you do not use the Close Period function, the system will still create auto adjusting entries at your set Fiscal Year End date so that the next year’s balances are accurately reset for the new fiscal period. These will also show on your general ledger report and cannot be deleted as it is necessary to ensure accurate reporting of the next period’s financial information. However, entries can still be made into the period as needed and it will continually update those adjusting entries until the Close Period is used to finalize and lock the period.

Re-opening a Closed Period

1. You can re-open a closed period if needed.
2. Go to the Financials >Close Period tab.
3. Expand the Previous Periods list.
4. Find the period you want to re-open.
5. Click the trashcan icon to delete and re-open it.
6. Click Yes on the Reopen Period pop-up box to confirm.
   NOTE:  Re-opening a period will automatically delete all closed periods that were closed on or after that date.
7. Select Yes on the question if you will be making entries into the period from the same pop-up box.