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Year-End Accounting Processing |
1 Initial Situation
At the end of the year, it is important to make some preparations so that the accounting can be properly completed - this also helps to save taxes. This includes considering the depreciation of assets, adjusting the value of inventories, and setting aside money for future expenses. It is the responsibility of the company to provide the necessary figures to the accountant so that the accounting can be adjusted accordingly. It is also possible to create a financial cushion to prepare for future times and still save taxes in it.
2 Types of Businesses and Required Information for the Annual Financial Statements
Companies are typically categorized into three core categories:- 1. Retail
- 2. Services
- 3. Manufacturing
- Hybrid Forms of the 3 Types
Retail Business
A retail business specializes in the sale of goods it does not manufacture itself but acquires for the purpose of resale at a markup - the art of retail lies in the difference between the purchase price and the selling price. These companies typically have a stock to ensure prompt deliveries or operate a retail store where shelves are always well-stocked. The core of such a retail business is the ability for customers to personally inspect products, purchase them immediately, and take home whatever catches their eye.List of Inventory
Throughout the year, a store's inventories undergo continuous changes driven by sales to customers and the subsequent need for replenishment. Smaller retailers often forego daily inventory checks and opt for a point-in-time inventory, where an exact, physical count and documentation of existing inventory is done at year-end.For larger retail businesses, the "Perpetual" or "Continuous Inventory" method is the preferred choice. This advanced system allows for seamless and immediate tracking of all inventory movements, ensuring an accurate overview of inventory at all times.
Regardless of the chosen method of inventory management, it is essential to provide the accounting department with a detailed inventory list. This list should include all items and their respective purchase prices. Here's an example:
Inventory List for Boutique Stilflair Zurich as of 31.12.2024
| Item | Quantity | Purchase Price | Total |
|---|---|---|---|
| Jeans | 20 | 12.50 | 250.00 |
| Shirts | 30 | 8.00 | 240.00 |
| Wool Sweaters | 15 | 9.80 | 147.00 |
| Total | 637.00 |
Overview of Outstanding Delivery Payments (2000 Liabilities)
Here, the accounting department requires a list of all invoices for goods that have been delivered to you but for which payment is not due for a few months. Beyond the year-end, there are often outstanding invoices that still need to be settled.Let's take the example of a jewelry retailer who purchased gold jewelry worth 150,000 CHF to prepare for the holiday season. This amount is still outstanding and will only be paid in January after good sales during the holiday season and January clearance sale. His liabilities to the wholesale supplier would look like this on his list:
Liabilities to Wholesale Supplier Bijoudaddy: 150,000 CHF
Overview of All Outstanding Payments for Delivered Goods (1100 Receivables)
This list includes all outstanding customer invoices. You have delivered goods and invoiced them in the past year, but some of these invoices have not yet been paid. If you deliver goods on credit - i.e., send the goods first and expect payment, for example, after 20 days - it is possible that there are still outstanding payments for delivered goods at year-end.Clear Presentation of All Debts
This list includes all debts, including all types of loans and special credits, such as those taken out during the Covid-19 pandemic. It is important to also consider the interest on these loans if it has been specified in the contract. In simple terms, this is a clear summary of everything you need to financially repay, including the additional costs incurred through interest.Detailed List of All Loans Granted
In this list, you record all loans that you have granted either to yourself or to third parties. This includes mortgages or personal loans to the business owner. Loans granted to employees are also listed here. While advances are often short-term and typically resolved within a year, loans generally have a longer duration. This overview provides a clear insight into all the monetary amounts that the company has loaned, regardless of whether they are larger sums like mortgages or smaller amounts.Precious Metals Such as Gold, Silver, Platinum, and Similar
Precious metals often experience price fluctuations. Therefore, it is important to accurately record the exact inventory of bars and coins in kilograms and grams. This detailed listing helps in determining the current value of the inventory in relation to the purchase price, thus providing a realistic assessment of the financial position.Gold Inventory of Girotex AG on December 31, 2023
| Bars | Quantity | Purchase Price | Current Price on December 31, 2023 |
Total |
|---|---|---|---|---|
| 100 Gram Bars | 20 | 5,212.00 | 5,774.00 | 115,480.00 |
| 500 Gram Bars | 2 | 4,360.00 | 28,543.50 | 57,087.00 |
| Total | 172,567.00 |
List of Outstanding Invoices for Investments and Operating Expenses
This pertains to the costs of acquisitions or services that have not yet been settled. This includes expenses for facilities, interior decoration, furniture, machinery and equipment, vehicles, computer equipment, as well as ongoing expenses such as electricity, telephone, and rent. It is important to distinguish between these expenses and the goods intended for resale. This list solely concerns expenses for items that are either used directly in the operation or contribute to production. Invoices for goods intended for sale can be found in the separate list titled "Outstanding Invoices for Goods Delivered to You (2000 Liabilities)."Overview of All Potential Risks such as Pending Legal Cases and Contractually Agreed Reserves
It is wise to create financial reserves for obligations that may potentially arise but are not yet certain. A typical example of this is an ongoing legal dispute that has not been resolved. In such a case, reserves should be set aside for expected legal and court costs, as well as a possible payment to the opposing party in case of losing the case. Once the matter is resolved, the accounting department should be informed so that this reserve can be adjusted accordingly.Another example is a software engineer who may be liable for any errors in their work up to a certain amount. In such cases, it is prudent to set aside at least a portion of the maximum liability amount. Here again, it is important to inform the accounting department so that these risks can be accounted for in the year-end financial statements. Note that the creation and dissolution of such reserves can impact the income statement, as they affect the operating results.
Overview of Lease Liabilities
In this section, we record all lease agreements that have a duration of more than one year and therefore cannot be terminated in the short term. Obligations from lease agreements that can be terminated within a year do not necessarily need to be included in this list.However, it is advisable to provide the accounting department with a complete list of all lease agreements. This way, the accounting department gets a comprehensive overview of all current and long-term lease liabilities of the company.
Service Business
A characteristic feature of service businesses is that they typically do not maintain a physical inventory. Therefore, the necessity to create an inventory list does not apply to this type of company. However, all other lists relevant to accounting are essential for service providers. These include, for example, lists of outstanding receivables and liabilities, lease obligations, and any provisions for pending risks. This ensures that even service-oriented businesses can present their financial situation fully and accurately.Intangible Assets
These are assets that are not physical in nature but often hold significant value and are crucial for the long-term value creation of the company. Intangible assets include:- Patents and Copyrights: These protect inventions, designs, and creative works and can grant exclusive rights to a company for their use and commercialization.
- Brands: The name and image of a company can represent substantial value, especially if they generate strong customer trust and brand loyalty.
- Software and Technologies: Developed or acquired software and technologies that are unique and provide a competitive advantage to the company.
- Customer Relationships and Networks: Established relationships with customers and business partners that can generate future revenues.
- Goodwill: This often arises in business acquisitions and represents the value above tangible assets. It can encompass factors such as reputation, customer base, and market position.
If your company possesses intangible assets, including brands, patents, copyrights, as well as self-developed software and technologies, it is important to include them in your inventory. Evaluating such assets requires careful coordination with your accountant and, if necessary, involving external experts.
When assessing intangible assets, the following general guidelines may be helpful:
- Identifiability and Control: Intangible assets must be clearly identifiable and controllable by the company.
- Long-term, Quantifiable Benefit: These assets should bring a multi-year, measurable benefit to the organization.
- Recognition and Measurement of Expenses: The costs of self-created intangible assets should be separately recognized and evaluated.
- Financial Resources for Completion: It should be verified whether sufficient financial resources are available to complete and utilize an intangible asset.
- Systematic Amortization: The amortization of intangible assets should occur over their expected useful life. If this is not clearly determinable, amortization should be spread over a period of 5 to a maximum of 20 years.
- Regular Impairment Testing: The impairment of intangible assets should be periodically assessed.
- Initial Assessment per Swiss GAAP FER 10: During the initial assessment, intangible assets should be reviewed based on the lower of cost and recoverable amount. The higher amount of value in use and net selling price determines the recoverable amount, which is compared to the carrying amount.
- Disclosure of Assets Held for Sale: According to Swiss GAAP FER 10.2/16, intangible assets held for sale must be presented under inventories.
- Breakdown in the Balance Sheet: The balance sheet should be categorized per Swiss GAAP FER into sections such as licenses/franchises, patents and technical know-how, brands and publishing rights, computer software, development costs, and other intangible assets.
Manufacturing Company
In Manufacturing Companys, in addition to the regular inventory, another crucial component comes into play: the inventory of raw materials. These materials vary depending on the industry. For example, steel construction companies may stock steel pipes, while manufacturers in the communication technology sector may keep fiberglass cables, and the electronics industry might maintain electronic components. The chemical industry stores various chemicals, and other manufacturing sectors hold semi-finished products.A good example of this is a printing press that stores paper, cardboard, and printer inks. For a chocolate manufacturer, it would be ingredients such as cocoa, sugar, and milk powder. In a carpentry workshop, it would be various types of wood and fittings. This diversity forms the basis for production processes and must, therefore, be accurately recorded in the accounting to ensure an accurate overview of available resources and the need for additional materials.
Furthermore, it is essential to create a list of unfinished and finished products, as well as any services that have been provided but not yet invoiced before the year-end. Finished products are listed in the inventory, while unfinished products are listed separately. Depending on the type of Manufacturing Company, unfinished products can also represent significant value. An example of this is the production of boats in a shipyard that are not yet fully completed.
Intangible Assets
In product development, a key area for Manufacturing Companys, the registration and ownership of patents play a central role. Patents are a significant component of a company's intangible assets and must be accounted for and listed accordingly in the financial records. These patents often represent substantial value as they grant the company exclusive rights to use, produce, and market an invention or a specific process.A vivid example of the importance of patents can be found in the pharmaceutical industry. Here, patents for active ingredients in medications are invaluable. These patents protect the company's research and development efforts and grant it the exclusive right to produce and sell the patented active ingredient for a specified period. This allows the company to recoup the substantial investments in research and development and generate profits before the active ingredient may potentially be imitated by generic manufacturers after the patent's expiration.
A similar scenario unfolds in other high-tech industries such as electronics or automotive, where patents for innovative technologies, manufacturing processes, or software solutions can provide a crucial competitive advantage. An automotive manufacturer, for instance, could hold a patent for a new, more efficient electric motor design that enhances the performance and range of its vehicles. In the electronics sector, patents for advanced semiconductor technologies or specialized software algorithms in smartphones and other devices could be of great significance.
These examples illustrate how essential patents are for success and competitiveness in product development. They serve not only as protection for innovations but also as a significant asset that can profoundly impact a company's long-term growth and profitability. Therefore, it is imperative that patents are meticulously recorded and evaluated in the accounting asset list to ensure an accurate and comprehensive understanding of the company's financial position.
3 Business-Specific Additions
Every business has unique needs. We recommend coordinating with your accountant who is familiar with your company's specific requirements and can provide you with tailored advice.This note is particularly directed at businesses with outsourced accounting, where as company management, you must gather the necessary figures. If accounting is fully handled internally, these details are, of course, already known.
The purpose of the information provided above is to create a comprehensive overview of your company's actual financial situation. An honest and complete summary prepared by the accounting department is essential for both short-term and long-term management planning.
4 Digital Accounting, Inventory Management, Customer Administration
The tasks listed here can be simplified by a digitally organized operation. Inventory management with QR or EAN codes that can be scanned and automatically deducted from the inventory effectively addresses the issue of inventory lists. Professional business software such as ABACUS, SAP, or Oracle offers such comprehensive solutions.However, one should carefully weigh the costs and benefits. Small businesses might be financially overwhelmed by such solutions and may not have the personnel to effectively utilize them. Whether the investment is worthwhile depends on individual circumstances.
5 Common Mistakes in Year-End Financial Statements
The most common mistakes we observe are:- No or incomplete inventory lists
- Incorrectly stating inventory at the sales price rather than the purchase price.
- Missing a breakdown of open receivables and liabilities.
- No detailed breakdown of debts and credits.
- Lack of communication between accounting and management.
- Ignoring information and requests from the accounting department.
- An attitude that underestimates the necessity of involvement in accounting matters.
To correct these mistakes:
It starts with the inner attitude towards one's own business operations. Once entrepreneurs fully accept responsibility for their business, the transformation from a hobbyist entrepreneur to a professional manager begins. This step allows for listening to professionals and learning new things, leading to a comprehensive understanding of all business areas and making informed decisions.What one doesn't know, one can learn – the will to do so is crucial.