How to close the fiscal year

During tax season, many doubts often arise regarding processes.

This is especially true when closing the fiscal year, a task that must be done with proper knowledge and accuracy.

What is the Fiscal Year-End closing?

The fiscal year-end closing is a process that must be carried out to ensure compliance with the company’s tax obligations.

This helps avoid penalties and allows the organization to assess its financial situation.

Difference between fiscal closing and accounting closing

Fiscal closing and accounting closing are two different processes that are carried out in companies and they are sometimes confused.

The accounting closing involves recording, adjusting, and regularizing financial transactions to reflect the true financial position of the company. It also includes preparing financial statements, such as the balance sheet and the income statement.

On the other hand, fiscal closing focuses on calculating and settling tax obligations in accordance with current legal regulations.

Steps to properly close the fiscal year

To avoid making mistakes and ensure the best possible fiscal closing, we recommend following these steps:

Pre-tax planning

Planning before the fiscal year-end is essential to optimize tax filing and take advantage of as many incentives as possible, leading to significant savings.

To achieve this:

Set clear tax objectives. This will help assess the impact of taxes on business decisions and plan investments that allow access to tax deductions.
Stay up to date with legal and tax changes. Regularly review applicable deductions, tax credits, and exemptions relevant to your industry or region.
Obtain all necessary documentation. Ensure that accounting records are well-maintained and include all invoices and bank statements.
Analyze with your accounting team or tax advisor. Validate the financial decisions made throughout the year.

Review of documentation and processes

By carrying out an analysis, errors that may affect financial stability and compliance with regulations can be identified and corrected.

Ensure that all issued and received invoices are recorded correctly. Invoice data must match contracts and commercial agreements. Verify that there are no duplicates or missing documents that could cause discrepancies.
Conduct a physical inventory of stock and compare it with accounting information. Identify differences between the two and correct potential errors in the valuation of goods or the allocation of accounts.
Reconcile bank account balances with statements issued by financial institutions. This helps detect unrecorded transactions, duplicate charges, or transactions that require clarification.
Analyze the procedures used during the fiscal year. This includes the management of collections and payments, as well as identifying errors caused by inadequate tools, lack of training, or poorly structured processes.

Pre-closing actions

Before completing the fiscal closing, there are several aspects that must be taken into account that may affect the accuracy of the accounts and the reflection of the company’s true financial situation:

Check whether assets and liabilities are valued correctly based on current circumstances. Values will need to be adjusted in accordance with market fluctuations, depreciation or other factors that may have altered them.
Record the depreciation of fixed assets, such as machinery, vehicles or technology, based on their useful life. This entry is very important, as it helps to reflect asset wear and tear and correctly calculate the operating profit.
Create the necessary provisions to cover potential future risks or losses. This includes client debts that show signs of default, pending litigation or warranties offered to third parties.

Regularization of income and expenses

It is necessary to perform an income and expense regularization to have an accurate and real view of the company’s profitability.

There are two steps:

Close the income and expense accounts. Credit all expense accounts to the profit and loss account. Likewise, debit all income accounts to the same account, in order to consolidate the results of the year in a single place.
Calculate the year-end result. The difference between the income and expenses recorded in the profit and loss account will determine whether the company has made a profit or incurred a loss. This result will be transferred to the company’s equity at the closing phase.

The fiscal year closing is the process by which the taxes that companies are obligated to pay are calculated and presented. To carry it out, it is advisable to conduct prior planning, review all documents and processes, and perform all necessary reviews and steps before the fiscal closing of the company.

Further information

This article is part of our service Business consulting. Visit this section where you will find all the useful information on this topic, including a complete guide on How to start a business in Spain as a foreigner.

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