A Busy Time for Accountants in the Czech Republic: How to Close the Reporting Year

The end of the year signals the need for finalizing transactions and preparing annual financial statements. This article outlines the most common procedures for closing accounts.

Accounting is often viewed as a complex system of information. To prepare a comprehensive set of financial statements, specific steps must be taken to close the books. This process involves several meticulous actions that must be performed in compliance with applicable laws.

Before we dive into the topic, let us remind you that at 360WEDO, our experts handle all your accounting needs for businesses in the Czech Republic. If you’re looking to outsource your accounting, save costs, and ensure that all financial operations are performed on time and in compliance with current Czech legislation, we’re here to help.

You can schedule an initial consultation to learn more about our business services. Now, let’s get started!

Why Is It Necessary to Close Accounts?

Closing accounts is a crucial part of the accounting process that ensures the reliability and accuracy of records, ultimately leading to the preparation of financial statements. Properly prepared financial statements are essential for meeting legal obligations and can also assist in making informed management decisions or planning future investments.

Inaccurate or incomplete accounting records can have serious consequences, including penalties from tax authorities.

Financial statements also serve as the foundation for tax returns, making it critical to ensure every step is performed correctly. It’s important to consider not only the company’s internal guidelines but also the applicable accounting regulations and standards, which may vary from country to country.

Accounts Inventory as a Fundamental Element of Financial Reporting

The most critical stage of financial reporting is the accounts inventory, which involves verifying the accuracy and completeness of the financial data. This process ensures that the account balances align with the actual figures presented in the balance sheet and income statements. Conducting this inventory is essential for making necessary adjustments and corrections.

As part of the accounts inspection, reconciliation between the general ledger and subsidiary accounts is performed. This involves comparing the balances in individual accounts with their corresponding entries in the subsidiary ledgers.

However, discrepancies between the actual and recorded positions may arise during the inventory process. These discrepancies can result from erroneous postings, duplicate entries, or omissions of certain transactions.

The inventory process also includes assessing outstanding accounts receivable and payable, as well as establishing reserves. It is crucial to evaluate their relevance, as these factors can significantly impact the accuracy of financial statements. Attention should be given to all items that may pose potential risks.

Inventory: Physical and Documentary

Inventory is the process of assessing the actual state of assets and liabilities. This stage includes a physical examination of tangible assets as well as a documentary review for items that cannot be physically counted. Conducting an inventory allows for the reconciliation of account entries with the actual state of affairs.

Physical Inventory:

This type of inventory involves verifying “tangible assets,” such as inventory, fixed assets, cash on hand, and other physical items. It is essential to conduct a physical inspection of these assets and compare their condition with the entries recorded in the accounting system.

Documentary Inventory:

This type of inventory focuses on assets and liabilities that cannot be physically verified, such as accounts receivable, accounts payable, and bank account balances. In a documentary inventory, it is necessary to ensure that all items are supported by the appropriate accompanying documentation.

Accounting for Inventory Differences

After conducting the inventory, it is essential to address any discrepancies between the recorded and actual positions. These differences may include:

Shortages

Shortages refer to losses of assets that must be resolved in accordance with internal policies or legal requirements. Such shortages can occur due to various reasons, including theft, record-keeping errors, or deterioration of assets.

Surpluses

Surpluses are items that have been discovered but not yet recorded in the accounts. When an inventory discrepancy is identified, it is crucial to accurately classify and value each difference. This means that every discrepancy should be thoroughly documented and quantified. Proper accounting for these differences ensures that subsequent balance sheets reflect the actual balances.

Creation of Reserves

The amount of reserves established must be verified at the time of closing the accounts. This verification process includes determining whether assets have temporarily depreciated or if there is a need to create a reserve for potential future liabilities. This practice aligns with the principle of prudence in accounting.

Reserves are often created for accounts receivable that carry a risk of non-collection. Establishing a reserve reflects the potential risk associated with these receivables and helps prevent the overstatement of asset values. The same principle applies to inventories stored in warehouses that may lose value due to obsolescence.

Additionally, reserves are created for anticipated future litigation when there is a risk of claims being filed, as well as for the maintenance of fixed assets, where reserves are set aside to “accumulate” expected future expenses.

The calculation of reserves must be based on accurate data and estimates that reflect the actual circumstances.

Accrual Accounting

A crucial step in closing the accounts is accrual accounting, which facilitates the implementation of the accrual principle. Accruals ensure that expenses and revenues are recognized in the periods to which they pertain, both in terms of timing and substance. This step is essential for maintaining the accuracy of financial statements.

A common example of accrual accounting is the recording of subscription services where the services are provided across different accounting periods. Another typical instance is rent that is paid retroactively.

In addition to accruals, it is also necessary to account for imputed items in situations where, for example, energy consumption has not been billed by the reporting date. In such cases, a reasonable estimate of that consumption must be made.

Foreign Currency Assets and Liabilities

Certain assets and liabilities denominated in foreign currencies must be revalued at the end of the financial year, and any corresponding exchange differences must be accounted for. Typically, this includes foreign currency-denominated bank accounts, treasury bills, trade receivables, and trade payables.

Source:

https://www.podnikatel.cz/clanky/konec-roku-je-za-nami-jak-na-uzaverku-ucetnictvi