YEAR-END CLOSE CHECKLIST

Closing the books at year end turns a year of day-to-day entries into figures that can go onto Form T2125. This page is a practical checklist for a sole proprietor with a December 31 year-end, in the order the work is usually done: decisions to make before the year closes, the review and adjusting entries after it, the tax adjustments that are made outside the books, and the filing deadlines that follow. How adjusting and closing entries are recorded is explained on the Bookkeeping Fundamentals pages.

BEFORE DECEMBER 31

• Equipment purchases: capital cost allowance can only be claimed for property available for use by year end. If equipment is needed early next year anyway, buying and setting it up before December 31 brings the first CCA claim forward a year.

• Bad debts: review receivables and decide which are uncollectible, so they can be written off or reserved for this year.

• Inventory count: schedule the physical count for December 31 or as close as possible.

• Vehicle logbook: record the odometer reading on December 31.

• Paying family members: wages owed to a spouse or child working in the business are deductible this year only if they are reasonable and actually paid within 180 days after year end.

RECONCILE AND REVIEW

• Bank and credit cards: reconcile every account to its December statement.

• Payment processors and clearing accounts: reconcile to the processor's year-end report and clear any balances.

• Accounts receivable: agree the total to the list of unpaid invoices and follow up on old items.

• Accounts payable: agree the total to unpaid supplier bills, and make sure bills for December costs received in January are included.

• GST/HST accounts: agree the balances to the returns filed for the year and the amount still owing.

• Loans: agree loan balances to lender statements, and split each year's payments between interest (deductible) and principal (not deductible).

ADJUSTING ENTRIES

• Accrued revenue: work completed in December but not yet invoiced is recorded as revenue. Professionals also record work in progress.

• Accrued expenses: costs incurred in December but billed later, such as utilities or professional fees, are recorded as expenses and payables.

• Prepaid expenses: the part of insurance, rent or subscriptions paid for next year is moved from expense to prepaid.

• Inventory: closing inventory is recorded at the counted and valued amount, and cost of goods sold is adjusted to match.

• Capital items: any equipment recorded as an expense during the year is moved to the asset account; any asset sold or scrapped is removed.

• Personal use: the personal share of vehicle, phone and other mixed-use costs recorded in the books is moved to drawings, using the logbook or a reasonable estimate.

TAX ADJUSTMENTS MADE OUTSIDE THE BOOKS

These are calculated on the tax return rather than recorded as journal entries, so the books show the full cost and the T2125 shows the deductible amount.

• Capital cost allowance: prepare the CCA schedule by class, including additions and disposals, and decide how much to claim.

• Meals and entertainment: reduce the total recorded to 50% for the T2125.

• Business-use-of-home: calculate the business share of home costs and any carryforward.

• Reserves: calculate any reserve for undelivered goods or services and add back last year's.

• Non-deductible items: remove club dues, fines and penalties, and the personal share of any costs not already adjusted.

CLOSE THE YEAR

• Final trial balance: run the adjusted trial balance and check that debits equal credits and every balance makes sense.

• Closing entries: close revenue, expense and drawings accounts to owner's capital, so the new year starts with only balance sheet accounts.

• Lock the period: in bookkeeping software, set a closing date so the prior year cannot be changed by accident.

• Back up and archive: save the year-end reports, reconciliations, count sheets, logbook and CCA schedule together.

FILING CALENDAR AFTER YEAR END

• End of February: T4 slips and the T4 Summary for any employees are due on the last day of February.

• Construction businesses: the T5018 information return for payments to subcontractors is due six months after the end of the reporting period.

• GST/HST annual filers: an individual with business income and a December 31 year-end must file by June 15, but pay any balance by April 30.

• April 30: income tax and CPP owing for the year must be paid.

• June 15: the T1 return, including Form T2125, is due.

• Next year's instalments: check whether quarterly instalments will be required, based on this year's balance owing.

KEY POINTS

• Decide before December 31: equipment purchases, bad debts and the inventory count date.

• Reconcile everything first: adjusting entries are only reliable once balances are confirmed.

• Books record cost; the return limits it: meals, CCA and home office are calculated on the T2125.

• Close and lock: so the year's figures cannot shift after the return is filed.

SOURCES

• Income Tax Act: sections 20(1)(a), 67.1 and 78(4).

• Canada Revenue Agency: Guide T4002; Guide RC4120, Employers' Guide, Filing the T4 Slip and Summary.

• Canada Revenue Agency: Guide RC4022, General Information for GST/HST Registrants (annual filing deadlines).