Year-end close under US GAAP: cut-off, accruals and adjusting entries auditors test

A year-end close under US GAAP produces a balance sheet that reflects every asset and obligation that existed at December 31 and an income statement that contains every revenue and expense of the year, and nothing from the next one. Four areas carry most of the adjustments: cut-off of sales and purchases around the balance sheet date, accruals and deferrals for costs incurred but not yet invoiced or paid in advance, reconciliations that tie each balance sheet account to independent evidence, and the review of subsequent events under ASC 855 until the financial statements are issued or available to be issued.

External auditors build their year-end procedures around the same four areas, because they are where income is most easily shifted between periods. A shipment invoiced on December 30 but delivered on January 3, a supplier invoice for December goods that arrives in the second week of January, or a customer bankruptcy announced three weeks after year-end can each move pre-tax income, and each has a defined accounting answer. For calendar 2026 closes, ASU 2025-05 also becomes effective, adding a practical expedient for estimating credit losses on current trade receivables, which changes how many companies support the allowance at December 31, 2026.

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WHAT THE YEAR-END CLOSE COVERS UNDER US GAAP.

The year-end close is the monthly close extended with procedures that only make sense once a year: physical inventory observation or roll-forward, the annual impairment and valuation allowance reviews, the income tax provision, the full set of footnote disclosures and the subsequent events review. The accrual basis is the same in every month, but at year-end the cut-off date is also the date on which audited balances are fixed, and errors left in the December ledger flow directly into the annual report and the tax return.

In practice the close runs in three phases. Before December 31, finance teams agree cut-off instructions with shipping, receiving and purchasing, schedule the inventory count and confirm which estimates need updated data. In the first two to three weeks of January, the team records cut-off corrections, accruals, deferral releases, reconciliations and estimate updates. After the books are locked, the subsequent events review continues until the financial statements are issued (SEC filers) or available to be issued (all other entities), and any recognized event found in that window still changes the December balances.

The adjusting entries themselves follow the same logic covered in the site's guide to accrued expenses and adjusting entries: an expense belongs to the period in which the goods or services were received, and revenue belongs to the period in which control of the goods or services passed to the customer under ASC 606.

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REVENUE AND EXPENSE CUT-OFF AT YEAR-END.

Revenue cut-off under ASC 606 depends on when control transfers, which for product sales usually follows the shipping terms and the point at which the customer obtains legal title, physical possession and the risks and rewards of ownership. An invoice date or a shipping document alone does not decide the period. Goods shipped on December 30 under terms where control transfers on delivery, and delivered on January 3, are revenue of the new year, and the related inventory stays on the seller's balance sheet at December 31.

Purchase cut-off is the mirror image. Goods and services received before year-end are liabilities at December 31 even when the supplier invoice arrives in January, which is why most ERP systems carry a goods received not invoiced (GRNI) account that must be reviewed and reconciled at year-end. Services such as utilities, legal work, contractors and freight rarely pass through a receiving process, so they are found by reviewing January invoices and payments for amounts that relate to December.

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Cut-off test	Population tested	What a failure looks like
Sales cut-off	Shipments last 5-10 days of December and first days of January	Revenue recorded before control transfers
Purchase cut-off	Receiving reports around December 31	Goods received with no liability recorded
Unrecorded liabilities	January invoices and payments	December services expensed in January
Credit notes	Returns and credits issued in January	December sales later reversed in the new year
Inventory cut-off	Last receiving and shipping documents at count date	Goods counted and also shipped, or vice versa

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The search for unrecorded liabilities deserves particular care, because December services that arrive without a purchase order bypass the GRNI process entirely. A disciplined approach reviews every January payment and invoice above a set threshold and documents the service period of each.

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YEAR-END ACCRUALS AND PREPAID EXPENSES UNDER US GAAP.

Accruals record expenses incurred but not yet billed or paid: interest on debt since the last payment date, payroll for days worked but not yet paid, employer payroll taxes, utilities, professional fees, commissions and bonuses earned under the year's plans. Where the amount depends on an uncertain outcome, such as a legal claim, ASC 450-20 requires a loss accrual when the loss is probable and can be reasonably estimated, and disclosure when it is reasonably possible. The US GAAP probable threshold means likely to occur, which is a higher bar than the more-likely-than-not threshold used for provisions under IAS 37.

Deferrals work in the opposite direction. Insurance premiums, software subscriptions, maintenance contracts and rent paid in advance are prepaid assets, released to expense as the coverage or service period passes. At year-end, each prepaid balance should be supported by a schedule showing the amount paid, the service period and the unexpired portion at December 31.

Many accruals are estimates recorded before the actual invoice exists. Auditors test them by comparing the year-end accrual with the amounts later invoiced or paid in January and February, so a close process that keeps track of how prior-year accruals compared with actual settlements has its own evidence ready.

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ACCOUNT RECONCILIATIONS AND THE CREDIT LOSS ALLOWANCE UNDER ASC 326.

Every balance sheet account should be reconciled at year-end to an independent source: cash to bank statements, receivables and payables to the subledgers and aging reports, fixed assets to the asset register, debt to lender statements, and intercompany balances to the counterparty's records. Bank reconciliations identify outstanding checks, deposits in transit and items recorded by the bank but not yet in the ledger, such as fees, interest and returned items; the site's guide to bank reconciliation timing differences and adjusting entries covers that procedure in detail.

Trade receivables at amortized cost carry an allowance for expected credit losses under ASC 326, the current expected credit loss model. ASU 2025-05, issued by the FASB in July 2025, adds a practical expedient for current accounts receivable and current contract assets arising from ASC 606 transactions: an entity may assume that the conditions existing at the balance sheet date do not change over the remaining life of the asset, which removes the need to build a macroeconomic forecast for short-dated receivables. Entities other than public business entities that elect the expedient may also make an accounting policy election to consider collections received after the balance sheet date, up to the date the financial statements are available to be issued or an earlier date they select.

ASU 2025-05 is effective for annual reporting periods beginning after December 15, 2025, and interim periods within those years, for all entities, with early adoption permitted and prospective transition. A calendar-year company that has not already adopted it applies it for the first time in its 2026 annual financial statements, which makes the year-end allowance memo the natural place to document the election.

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SUBSEQUENT EVENTS UNDER ASC 855 AND IAS 10.

ASC 855 divides events after the balance sheet date into two groups. Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date, including the estimates made in preparing the financial statements, and their effects are recorded in the December balances. Nonrecognized subsequent events concern conditions that arose after the balance sheet date; they are not recorded, but they may require disclosure.

FASB's examples are direct. A lawsuit whose underlying events occurred before year-end and that settles in January for a different amount than the recorded liability is a recognized event, and the settlement amount is used to measure the year-end liability. A customer bankruptcy after year-end usually reflects a deteriorating financial condition that already existed at the balance sheet date, so it is used in measuring uncollectible receivables. Issuing stock or bonds, completing a business combination, a fire or flood that destroys inventory, and changes in fair values or exchange rates after year-end are nonrecognized events.

SEC filers evaluate subsequent events through the date the financial statements are issued and do not disclose that date. Other entities evaluate them through the date the financial statements are available to be issued and must disclose that date and whether it is the issued or available-to-be-issued date. IAS 10 uses the same split between adjusting and non-adjusting events, with the window ending on the date the financial statements are authorized for issue, which the entity discloses. The site's article on subsequent events after the balance sheet date covers the disclosure side, and the related assessment of going concern under IAS 1 and ASC 205-40 runs in the same post-year-end window.

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YEAR-END CLOSE: US GAAP VS IFRS DIFFERENCES.

The mechanics of cut-off, accruals and reconciliations are identical under both frameworks. The differences sit in the recognition thresholds and in a few estimate and classification rules that are revisited at every year-end.

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Year-end area	US GAAP	IFRS
Events after year-end	ASC 855: recognized vs nonrecognized	IAS 10: adjusting vs non-adjusting
End of review window	Issued (SEC filers) or available to be issued	Date authorized for issue
Loss accrual threshold	ASC 450-20: probable (likely to occur)	IAS 37: more likely than not
Trade receivable losses	ASC 326 CECL, ASU 2025-05 expedient	IFRS 9 expected credit losses, simplified approach
Inventory write-down reversal	Prohibited	Required when net realizable value recovers
Debt refinanced after year-end	Noncurrent if refinanced on a long-term basis before issuance	Current unless the right to defer existed at year-end
Dividends declared after year-end	Not a liability at year-end	Not a liability at year-end

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The debt classification row affects many year-end balance sheets. A loan due within twelve months that is refinanced in January can be presented as noncurrent under US GAAP if the refinancing is completed, or supported by a qualifying financing agreement, before the financial statements are issued; under IFRS the classification depends on the rights the borrower had at the reporting date, so a January refinancing does not change a current classification at December 31.

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WORKED EXAMPLE: YEAR-END ADJUSTING ENTRIES FOR A CALENDAR 2026 CLOSE.

An illustrative distribution company closes its books for the year ended December 31, 2026, under US GAAP. It is not a public business entity and applies the ASU 2025-05 practical expedient without the election to consider subsequent collections. The close team identifies the following items in January 2027.

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Item	Facts (illustrative)
Goods received not invoiced	Inventory received December 28, supplier invoice of $18,400 arrives January 6
Sales cut-off	$25,000 sale (cost $15,000) recorded December 30; control transfers on delivery January 3
Interest	$1,200,000 term loan at 6.5%, interest last paid November 30
Insurance	$36,000 annual premium paid October 1, 2026, fully recorded as prepaid
Utilities	December bill of $4,200 received January 12
Bank fees	$350 of December fees on the bank statement, not in the ledger
Customer bankruptcy	Customer owing $6,000 (61-90 days past due) files for bankruptcy January 20, 2027, after months of financial distress

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After reversing the premature sale, accounts receivable fall from $642,000 to $617,000. The allowance is measured on the corrected aging using loss rates based on historical experience adjusted for current conditions at December 31, as the practical expedient permits.

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Aging bucket	Receivable ($)	Loss rate	Allowance ($)
Current	480,000	1%	4,800
1-30 days past due	82,000	3%	2,460
31-60 days past due	35,000	10%	3,500
61-90 days past due	12,000	25%	3,000
Over 90 days past due	8,000	60%	4,800
Total	617,000		18,560

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The January bankruptcy is a recognized subsequent event because the customer's financial distress existed at December 31. Its $6,000 balance already carries a 25% allowance of $1,500 in the 61-90 day bucket, so a further $4,500 is needed to reserve it in full. The required allowance is therefore $23,060. With an existing allowance of $11,200 in the ledger, the year-end adjustment is $11,860, and net receivables at December 31 are $593,940.

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Entry	Account	Debit ($)	Credit ($)
1. GRNI	Inventory	18,400
1. GRNI	Accrued liabilities (goods received not invoiced)		18,400
2. Sales cut-off	Revenue	25,000
2. Sales cut-off	Accounts receivable		25,000
2. Sales cut-off	Inventory	15,000
2. Sales cut-off	Cost of goods sold		15,000
3. Interest	Interest expense	6,500
3. Interest	Accrued interest payable		6,500
4. Insurance	Insurance expense	9,000
4. Insurance	Prepaid insurance		9,000
5. Utilities	Utilities expense	4,200
5. Utilities	Accrued liabilities		4,200
6. Bank fees	Bank fees expense	350
6. Bank fees	Cash		350
7. Credit losses	Credit loss expense	11,860
7. Credit losses	Allowance for credit losses		11,860
Total		90,310	90,310

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The December interest accrual is one month on $1,200,000 at 6.5%, or $6,500, and the insurance expense covers October to December, three twelfths of $36,000, or $9,000. The GRNI entry has no income statement effect because the goods are still in inventory. The sales cut-off correction removes $10,000 of gross margin from 2026, and the remaining entries add $31,910 of expenses, so the adjustments reduce 2026 pre-tax income by $41,910 before the income tax effect, which is then picked up in the year-end tax provision.

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YEAR-END CLOSE ERRORS THAT AUDIT TESTS ARE DESIGNED TO CATCH.

The first group of errors concerns timing. Revenue recorded on invoice or shipment rather than on transfer of control, December services left out of accruals because no purchase order existed, and credit notes issued in January for December sales without an assessment of whether a returns liability was needed at year-end all move income between periods. Each is found by testing transactions on both sides of December 31 rather than only the December ledger.

The second group concerns estimates. A credit loss allowance that is still based on a prior-year rate table, an accrual carried forward without comparison to the amount actually paid, or a bonus accrual based on the original plan rather than the year's actual performance all leave stale estimates on the balance sheet. Under ASC 855, information received in January about conditions at December 31 must be reflected in those estimates, and a close process that ends its review on the day the ledger is locked misses this.

The third group concerns classification and presentation: debt reclassified as noncurrent on the strength of refinancing talks that were not completed or supported by a qualifying agreement before issuance, dividends declared in January recorded as a December liability, and unreconciled suspense or clearing accounts netted into other balances. These do not always change income, but they change ratios that lenders test, and auditors examine them against the underlying agreements.

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YEAR-END CLOSE CHECKLIST FOR A US GAAP CALENDAR 2026 CLOSE.

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Step	Evidence to keep
Agree cut-off instructions before December 31	Last shipping and receiving document numbers
Test sales and purchase cut-off	Shipping terms, delivery proof, receiving reports
Search for unrecorded liabilities	January invoices and payments with service periods
Record accruals and release prepaids	Schedules tied to contracts and later settlements
Reconcile every balance sheet account	Signed reconciliations with aged reconciling items
Update the ASC 326 allowance	Aging, loss rates, ASU 2025-05 election memo
Review subsequent events to issuance	Log of January-March events and their classification
Review debt classification and covenants	Loan agreements, refinancing documents

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The checklist works best when each step has a named owner and a due date in the close calendar, and when the subsequent events log stays open until the date the financial statements are issued or available to be issued rather than until the ledger is locked.

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US GAAP YEAR-END CLOSE: CONCLUSIONS FOR THE 2026 YEAR-END.

The rules that decide year-end adjustments are settled and identical in most respects under US GAAP and IFRS: revenue follows the transfer of control under ASC 606, expenses follow the receipt of goods and services, every balance sheet account is supported by a reconciliation, and events after December 31 that reveal conditions existing at year-end are recorded in the year-end balances. For calendar 2026, ASU 2025-05 is the one new element in the closing routine for most companies, giving all entities a simpler basis for the credit loss allowance on current trade receivables and giving private companies an option to use subsequent collections.

The amounts that need judgement are the estimates: the loss rates behind the allowance, the measurement of accruals for services not yet invoiced, the classification of a January event as recognized or nonrecognized, and the debt classification when refinancing is under way at the reporting date. These depend on the facts of each company, and they carry the most weight when the close team documents its reasoning before the auditors arrive rather than after they ask.

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