As the year draws to a close, businesses must prepare for the crucial task of year-end closing. This process ensures that all financial transactions for the year are accurately recorded and reported.

With over 20 years of experience in the Dynamics ecosystem, I’ve guided numerous businesses through this critical period. In this article, I outline the key steps for the year-end closing process in Dynamics 365 Business Central, providing valuable insights on how to address and avoid common pitfalls. This guide will help you navigate the year-end close efficiently and effectively.

The Year-End Process

The complete year-end process involves 8 major steps. I will cover the components of each step in detail as follows:

1. Preparation: Process 1099s and Prepare Key Reports
2. Close the Current Fiscal Year
3. Create a New Fiscal Year
4. Close the Income Statement
5. Run the Trial Balance & Adjust Entries
6. Audit Entries
7. Re-Close
8. Print the Trial Balances and The Reports

1. Preparation

Processing 1099s

In the US, processing 1099s is the first thing we’d want to complete. Ensure that the 1099 option is enabled in your feature management and for the vendor 1099 information report, and run a test report to verify accuracy. I suggest you test one of your vendors first to make sure that it has run properly.

For the vendor 1099 information report, you can view the balances and make adjustments, if necessary, through the vendor ledger entries. You can order pre-printed forms or submit them electronically to the IRS.

Prepare Your Key Reports

When you’re inside Business Central, start by searching for the Chart of Accounts. This will list your accounts in numerical order. Add a column on the right-hand side called “Income Statement and Balance Sheet.” This column will help you ensure that your accounts are properly classified as either Balance Sheet or Income Statement accounts.

Verifying these classifications is crucial because Balance Sheet Accounts roll into the next year for closing, while Income Statement Accounts roll into your retained earnings when closed. Mislabeling these accounts can lead to year-end adjustments that reverse and complicate the audit trail.

Verify Control Accounts

The next step is to go into your control accounts. Ensure that the Sub-Ledger matches the General Ledger control accounts. This includes accounts such as accounts payable (AP), accounts receivable (AR), fixed assets, and inventory.

Verify that the Direct Posting option is turned off for these control accounts. Direct Posting should typically be disabled to prevent any direct entries into the control accounts, which can lead to discrepancies and complications in your financial records.

Resolving Sub-Ledger and General Ledger Discrepancies

There are several common reasons for discrepancies between Sub-Ledger accounts (such as AP, AR, inventory, and fixed assets) and the General Ledger:

1. Direct Posting: If direct posting is enabled, it allows general ledger entries to be made directly into control accounts, which can cause discrepancies. Ensure that direct posting is turned off to maintain consistency between Sub-Ledger and General Ledger accounts.
2. Initial Implementation Checks: During the initial implementation of your Business Central system, consultants should verify that the first open entries match the control accounts to the sub-ledger accounts. If there is a mismatch at this stage, it can perpetuate through subsequent months, leading to ongoing discrepancies.
3. Improper Posting Groups Setup: Incorrect setup of posting groups can also cause mismatches. It is crucial to review and ensure that posting groups are correctly configured, especially during the first year-end closing, to maintain accurate balances.

How to Address Mismatches

• Material vs. Non-Material Items: Determine whether the discrepancy is material or non-material. This will guide your approach to resolving the issue.
• Monthly Analysis: Examine each month individually. For example, if January shows a $100 discrepancy and February shows $120, it indicates a $100 error in January and an additional $20 error in February.
• Reconciliation Process: Load both Sub-Ledger and General Ledger lists into Excel and use functions like VLOOKUP or MATCH to identify mismatched entries. This helps pinpoint manual entries or issues caused by direct posting.

2. Close the Current Fiscal Year

Once you’ve reviewed and corrected any discrepancies, the next step is to navigate to the accounting period.

1. Navigate to the Accounting Period in the search bar, which is located under Administration.

In the Accounting Periods section, you will find options such as Inventory Period, Create Year, and Close Year.

2. Select “Close Year” to close the year.

3. Verify the Date Range: Once you’ve selected “Close Year,” ensure the date range for the fiscal period is correct. The date range for the fiscal period you are closing will be displayed before you finalize the close, for example, from 01/01/2024 to 12/31/2024.

It’s important to note that once the fiscal period is closed, it cannot be reopened. Therefore, it is crucial to perform this process in a sandbox or test environment first. This ensures that the closing entries are accurate, the retained earnings flow properly from the income statement, and the balance sheet moves forward correctly.

3. Create a New Fiscal Year

After closing the year, the next step is to create a new fiscal year.

1. Navigate to the Accounting Period: Type “accounting period” in the search bar and select it under Administration.

2. Select “Create Year” in the Accounting Periods section.

3. Specify the Starting Date and Period Length

In this example, the starting date is January 1st, 2026. You will also need to specify the number of periods and the period length. For instance, if your year-end starts on January 1st, you can set the period length to 1M, which stands for one month. If your year-end starts on a different date, you can adjust the starting month accordingly, such as March or April 1st.

Once you have entered the necessary information and clicked OK, the Accounting Periods screen will display the newly created entries.

4. Verify the Entries: Check the Accounting Periods screen to ensure the new fiscal year entries have been created and that the closed years are indicated with a checkbox.

It’s important to note that you can still enter transactions into closed years, such as adjustment entries from your auditors.

4. Close the Income Statement

After creating the new fiscal year, the next step is to close the Income Statement. To do this, search for the “Close Income Statement” task. When you click on the screen, you’ll see several options.

Options:

Fiscal Year Ending Date: First, you’ll need to enter the Fiscal Year Ending Date. In the example provided, the date is December 31st, 2023. However, this date will vary depending on your specific year-end. Make sure to input the correct year-end date, whether it’s in the middle of the year or different from the calendar year.

General Journal Templates: Next, you’ll select the General Journal Templates. In this case, you can use the GENERAL template.

General Journal Batch: For the General Journal Batch, it’s good practice to create a batch for each year-end so you can delete it after posting. For example, you might name it Year-End 2024 or YE2024 to keep track of the entries and avoid confusion with multiple batches.

Document Number: Ensure the proper Retained Earnings account is used to avoid complications. Using the wrong retained earnings account can lead to complications, requiring you to reverse and redo entries, which can be messy from an audit perspective.

Post to Retained Earnings Account:  The next step is to post to Retained Earnings. You can do this in two ways: in Balance or in Details.

1. Balance: If you choose to post in Balance, the entries will be summarized. For example, in your general journal batch for year-end 2024, you will see a “C” beside the entries, indicating they are closing entries. The amounts, debits, and credits will be posted to your retained earnings as a summary.
2. Details: Alternatively, you can choose to post in Details. This method posts detailed transaction amounts. For instance, you might see multiple lines for an account like 18101 Undeposited Funds Cash, showing each transaction individually rather than as a summary like Balance.

Posting Description: You will need to provide a Posting Description for each, which can be “Close Income Statement.” This description helps identify the purpose of the entry.

Close by

You can close by Business Unit Code or by Dimensions.

1. Business Unit Code: Close by Business Unit Code if you are dealing with intercompany transactions or multiple companies. This allows you to manage entries specific to each business unit.
2. Dimensions: Closing by dimension allows for more detailed tracking and reporting capabilities. To select your dimensions, click on the three dots in the box, and a display will appear, enabling Dimension Selection.

You can either schedule it for a specific time or click OK to process it immediately.

5. Run the Trial Balance & Adjust Entries

The next step is to run the trial balance to ensure the entries flow properly. This is crucial to ensure that your balance sheet moves into the next year correctly and that your income statement accounts are zeroed out on the new trial balance, and they should flow into retained earnings.

To do this, run your trial balance and verify that everything is correct. A helpful tip is to copy the company into a test company or sandbox environment and test the closing process to ensure accuracy. Reversing entries can be quite messy, so it’s important to get it right the first time.

If you have adjusting entries, enter them and then re-run the trial balance after completing the closing entries. This ensures that all adjustments are accounted for and that the closing process is accurate.

6. Audit Entries

Make any necessary year-end adjustments and re-run the close Income Statement process to include these adjustments.

7. Re-close

When creating adjusting entries, only the newly created ones are included, not the previous entries that were already closed.

8. Print the Trial Balances and the Reports

Finally, go into your General Ledger Setup and change the ‘Allow Posting From’ and ‘Allow Posting To’ dates to prevent any further entries from being posted into the previous year.

For a more detailed overview of the year-end close processes for Dynamics 365 Business Central, watch this recording:

If you would like personalized guidance on how to maximize your business’s benefits from Dynamics 365 Business Central, please contact us. We’d be happy to help.