Year-End Accounting Adjustments & SME Accounting Plan
Accounting Adjustment Process and Year-End
A company’s activity is divided into cycles or time units called economic periods. These cycles can vary in length, but are usually established on an annual basis to coincide with the calendar year, i.e., each fiscal year begins on January 1st and ends on December 31st.
At the end of each fiscal year, the company calculates its activity to determine its precise profit or loss and financial position. These data form the basis for business analysis and planning for the next year.
To determine economic performance through accounting, the company needs, in addition to standard accounting records, specific adjustments for the financial year.
Accrued Expenses and Income
Accrued expenses and income involve recording costs that belong to the current economic year but are missing from accounting records, or correcting previous postings. At year-end, a company may have outstanding income and expenses payable and receivable, respectively, that have not yet matured for disbursement. These are known as deferred payments.
It’s also possible that costs have been paid or revenue collected that wholly or partially belong to the following year. These are called prepaid expenses and unearned revenue.
Deferred Payments and Receipts
The economic result should include all revenue and costs of the current year, even if payment has not yet occurred. Therefore, it’s necessary to account for expenses under payable or receivable income, making accounting entries and recording them in their respective accounts.
Prepaid Expenses and Unearned Revenue
To accurately calculate profit or loss, it’s also necessary to investigate whether expenses were paid or revenue was received that belongs to the following year. We must correct the accounting entries for these costs or revenues, making new entries for amounts that do not correspond to the current year.
General Accounting Plan for SMEs
To facilitate the implementation of the general accounting plan for small and medium enterprises (SMEs), an update has been made, eliminating some accounts and simplifying the presentation of certain documents.
The implementation of this plan is voluntary for companies that may choose to use either the general accounting plan or the specific plan for SMEs.
The General Accounting Plan for SMEs has the same structure as the general accounting plan, divided into five parts, with the first three being mandatory. The main differences are:
- Part 1: Conceptual framework of accounting. Similar in both plans.
- Part 2: Rules of registration and valuation. Some standards for rare operations by SMEs have been eliminated.
- Part 3: Annual accounts. Presents a single abbreviated model, including other general models.
- Part 4: Chart of accounts.
- Part 5: Definitions and accounting relationships. Refers only to the first seven groups of the general accounting plan accounts, not groups 8 and 9.
Who Can Apply the SME Accounting Plan?
All undertakings, regardless of their legal form, can implement the SME accounting plan if, for two consecutive years, they meet at least two of the following criteria at the end of each year:
- Total assets not exceeding €2,850,000.
- Net annual turnover not exceeding €5,700,000.
- Average number of employees not exceeding 50.
For new firms, the requirement to implement this plan is that they meet at least two of the above conditions at the end of their first year.