Closing the Books: How Year-End Accounts Are Finalized

Imagine you run a neighborhood coffee shop. After the last customer leaves and you lock up, you count the cash that came in and compare it with what you spent on supplies. Only after closing out the register can you tell for sure whether today was a profitable day.

A company's year-end close works the same way. It's just a much bigger version, done every quarter (3 months) or every year instead of every day. You gather every receipt for goods sold, salaries paid, and office rent, and you lock in the company's real profit or loss for good.

Without it, a company would be sailing blind, with no idea whether it's making money or losing it. Management uses the results to plan next year's business and to decide how big the employee bonuses should be.

Closing the books isn't just looking at the cash balance in a bank account. That's because accounting follows accrual accounting, which records events when they happen, not when money changes hands.

Here's an example. Say you pay a full year of office rent, 12 million won (about $9,000), all at once in December. Your bank account takes a big hit right away, but that cost is really value you'll use up month by month over the coming year. When you close the books, only the 1 million won (about $750) that belongs to this month counts as an expense for this year. The other 11 million won gets pushed forward to next year's expenses.

Also, if you buy an expensive factory machine that will last 10 years, you don't count the whole price at once. You expense only the value it wears away each year. By carefully adjusting for unpaid invoices, inventory, depreciation, and more, you finally see the company's true performance for the year.

Once all the calculations and adjustments are finished, the company's official report card, the financial statements, is complete. The best-known ones are the income statement, which shows how well the company did over the year, and the balance sheet, which shows what the company owns and owes as of the closing date.

The company doesn't just write this report card however it likes. Publicly listed companies, and companies whose assets, debt, sales, or headcount pass the thresholds set by law, must be audited by an outside certified public accountant (an external auditor, such as an accounting firm). The auditor checks whether the financial statements were prepared fairly under accounting standards and issues an audit opinion. Only with an unqualified (clean) opinion is it accepted as a trustworthy financial report. If there are problems, the auditor may issue a qualified opinion, an adverse opinion, or a disclaimer of opinion. Small companies and sole proprietors that fall below these thresholds usually finish their year-end close without an outside audit.

The finished statements get approved by shareholders at the annual general meeting (or, if certain conditions are met, approved by the board and then reported to the shareholders' meeting). They also become the basis for filing corporate income tax with the tax office. Stock investors pore over these results, too, to decide whether to keep investing in the company.