Closing the 2023 accounting year

Closing the accounting year means you are required to prepare financial statements for 2023.

The preparation of the financial statements is preceded by the closing of the books, together with the related stocktaking and the closing of the individual accounts in the general ledger under double-entry bookkeeping.

Closing of the books:

– the process by which all accounts in the ledger are closed at the end of the accounting period,

– carried out at the end of the accounting period (at the end of a month, quarter or year).

Financial statements:

– mean the closing or completion of the accounting period, determined on the basis of the results of the closing of the books,

– follow the closing of the books and are the last step before the financial reports are produced.

In essence, the closing of the books is a process, while the financial statements are the result of that process and involve producing financial reports from the accounting data. The financial statements are also a document that is filed with the Register of Financial Statements, an obligation that every legal entity has.

The first step in closing the books is to process and book, in full, all accounting transactions connected with the period that is ending. Specifically, these are:

• invoices and credit notes issued,
• invoices and credit notes received,
• documents from the last month of the year,
• cash desk transactions,
• wages for December, even if they are paid in January,
• motor vehicle tax.

These items play a key role in determining the company’s profit or loss. When closing the accounting period, you also need to book uninvoiced deliveries that relate to that period. It is important that both costs and revenues are allocated to the correct accounting period, not only in terms of their substance but also in terms of timing.

RECLASSIFYING RECEIVABLES AND PAYABLES

This applies, for example, to loan or lease instalments, which are long-term receivables or payables, but part of them has to be reclassified as short-term, that is, as at the end of the year. Long-term and short-term receivables are reported on different lines of the balance sheet. A qualified accountant is best placed to advise you on this reclassification.

CHECKING THE ACCOUNTS

Before closing the books, it is essential to verify that the accounts balance. This involves checking the account balances from the previous period to see whether they agree with the opening balances of the accounts in the current period.

WAREHOUSE CHECK AND STOCKTAKING

It is important to book the purchase and consumption of inventory correctly during the year. There are two methods of accounting for it. The help of an accounting firm can be useful in setting this up correctly and choosing the best option for your inventory.

STOCKTAKING OF ASSETS

Stocktaking covers not only assets and liabilities but also the difference between them, that is, equity. A business must monitor the value of its equity, because if equity falls into negative figures or the ratio of equity to liabilities shrinks significantly, it faces the risk of insolvency under Section 67a of the Commercial Code. This may give rise to further obligations for the company.

RECONCILING RECEIVABLES AND PAYABLES WITH BUSINESS PARTNERS

The closing of the books is only complete once receivables and payables have been covered by the stocktaking and also confirmed by your business partners. Their confirmation is key to a complete stocktaking.

CREATING AND RECONCILING PROVISIONS

At the end of the accounting period, the following provisions in particular are created:

• A provision for unused annual leave is created to cover wage compensation to employees for annual leave not taken in the past accounting period.
• A provision for valuation allowances on receivables is created for expected losses on receivables that are unlikely to be paid or are disputed.
• A provision for the impairment of inventory is created for expected losses from a fall in the value of inventory.
• A provision for warranty repairs is created for the expected costs of warranty repairs of goods or services sold to customers.

Creating tax-deductible provisions is an excellent tool for legally optimising income tax, as they are an expense that the business owner does not have to pay at that point. Do not hesitate to contact your accountant about creating provisions correctly.

BOOKING MOTOR VEHICLE TAX

If a business used a motor vehicle in the course of its business activities, it is required to file a motor vehicle tax return and then pay the motor vehicle tax. This tax is due by 31 January 2024, and the related costs are charged to the accounting period in which the vehicle was used. This also applies to motor vehicles the business owner used even though they were not included in the company’s assets.

PAYING INVOICES THAT ARE TAX-DEDUCTIBLE ONLY ONCE PAID

Under Section 17(19) of the Income Tax Act, the following items, apart from expenses (costs) that form part of the acquisition cost or own cost of assets, are included in the taxpayer’s tax base only once they have been paid:

• compensation payments made under the Act on Regulation in Network Industries, for the debtor,
• rental expenses (costs),
• expenses on marketing and other studies and on market research, for the debtor,
• fees (commissions) for brokerage, for the recipient of the service,
• expenses (costs) relating to the payment of income under Section 16(1) of the Income Tax Act,
• expenses on advisory and legal services (classification codes 69.1, 69.2, 70.1 and 70.22),
• the flat-rate compensation for costs associated with recovering a receivable, contractual penalties, late-payment fees and late-payment interest, for the debtor, and compensation for withdrawal from a contract (odstupné), for the entitled person,
• sponsorship expenses, for the sponsor,
• advertising expenses provided to a non-profit organisation, foundation, non-investment fund or civic association,
• insurance tax paid by the policyholder and insurance tax on recharged insurance costs under the Insurance Tax Act,
• levies on excess income under the Energy Act.

BOOKING INCOME TAX

If we have followed all the steps, we can move on to completing the income tax return. Once the tax payable has been calculated and the income tax return filed, the liability to pay this tax is booked.

After checking the accounts, filing the income tax return and booking the tax payable, you can close the books and carry the balances forward into the new year. If you are unsure about any step, it is time to turn to an accounting firm. It will make sure that the closing of the books is carried out on time and in accordance with the law.