Year-End Accounting Adjustments and Profit Determination

B. Changes in Inventories

The company must make an inventory of the stocks it has, doing a physical count of them and checking the result with the information recorded in the book balance. After verifying this data and correcting any differences, it is necessary to stabilize stock accounts; that is, to correct the accounting balance of these accounts to reflect reality.

C. Verification of Accounting Data

Before determining the result of the accounting fiscal year, the company must verify accounting data by checking, on the one hand, that there are no mistakes in arithmetic or transcription and, on the other, contrasting it with the economic reality. To do this, perform the following inventories and balances:

• Trial Balance: Its purpose is to check the arithmetical accuracy of the accounts by transcribing the sums of the movements and balances of all company accounts.
• The Year-End Inventory: At the end of the exercise, a comprehensive inventory of all assets and liabilities should be conducted, examining them and doing a physical count of them to obtain direct information on the economic reality of the business. The inventory data should be compared with the balances of the various asset accounts.

D. Determining the Outcome

Determining the outcome is the ultimate goal of the whole process of accounting adjustment. The result of the financial period is set by comparing the income and expenses that the company has had in that period.

If revenues total more than expenses, the result will be a benefit or gain, and if the expenses add up to more than the revenue, a loss will result. If a firm is profitable, its assets shall be increased by the same magnitude as the benefits it had. If it gets lost, the asset has also declined in the same amount as the losses experienced.

This is because consumption expenditures can be considered asset decreases, while income can be considered as asset recoveries, and gains are the same.

E. Tax Issues in Determining the Outcome

The result is the profit before tax.

• If it is an individual employer, the benefit obtained from their business will be part of all income earned in the year, which shall be subject to Individual Income Tax. It will also impact other aspects, such as family and personal circumstances.
• If it is a company with a corporate form, the profit or loss should include the amount it will pay to public finances for income tax, as this tax is considered to be one more expense for the company, and it falls on the company and not on the individual employer.

F. Benefit Sharing

In the individual company, the employer, as the person responsible for their company, can freely dispose of the benefit obtained. However, in a social enterprise, where the property is distributed among several partners and where they have different degrees of responsibility according to the type of society, its distribution is regulated.

G. Year-End

Once the accounting adjustment process is complete and the outcome of the exercise has been determined, the accounts should be closed. The operations necessary for closing the accounts are the following: Trial Balance and closing entry.

• Trial Balance: A new Trial Balance must be created to verify the regularization entries made and the various cycles.
• Closing Entry Accounting: The financial year closes, leaving all the bills paid.