Year-End Adjusting Entries: A Guide to Closing Operations

Quick answer. Year-end adjusting entries are the accounting entries posted at the close of the financial year to match each expense and each income to the correct period and present a true and fair view of the company's position. They cover four main families: depreciation, provisions and impairments, accruals (accrued expenses, accrued income, prepaid expenses and deferred income) and inventory valuation.

At year-end, the trial balance produced by day-to-day bookkeeping is not enough to deliver a sincere balance sheet. A machine financed in September has lost value, a December supplier invoice has not yet arrived, a dispute threatens a receivable, the stock of goods has moved. All these economic realities must enter the accounts before the balance sheet and income statement are prepared. That is precisely the purpose of closing operations.

This guide is not the owner's to-do list: for the practical closing sequence, see our checklist of closing steps. Here we explain the accounting mechanics themselves: which entries, why, and what the firm checks behind each one.

The French Commercial Code requires every company subject to bookkeeping to carry out, at least once every twelve months, a physical inventory and to prepare annual accounts that give a true and fair view (articles L123-12 to L123-28). Adjusting entries translate this review of assets and commitments into accounting language.

Two founding principles govern them. First, the independence of accounting periods: each expense and each income must be matched to the period it actually relates to, regardless of the invoice or payment date. Second, the prudence principle: a probable loss in value is recognised as soon as it is known, a gain only when it is certain.

Without these entries, the result is wrong in both directions. Omitting an accrued expense artificially inflates profit and tax. Omitting an impairment on a receivable presents an overstated asset. The reliability of the balance sheet, and therefore the quality of management decisions, depends directly on the rigour of this work.

1. Depreciation#

Depreciation reflects the consumption of an asset's economic benefits over its useful life. Each year, a charge reduces the net book value of the asset and weighs on the result.

The standard entry debits account 6811 (depreciation charges on fixed assets) against account 28 (accumulated depreciation). For equipment acquired at 12,000 euros excluding VAT, depreciated on a straight-line basis over 5 years, the annual charge is 2,400 euros: debit 6811 for 2,400, credit 28154 for 2,400.

The depreciation schedule is calculated case by case depending on the method chosen (straight-line or declining balance), the useful life and, for some assets, the breakdown into components. On that last point, see our analysis of component-based depreciation, which changes the pace of charges when an asset combines elements with distinct useful lives.

2. Provisions and impairments#

A provision recognises a probable risk or charge whose timing or amount is uncertain: an employment dispute, a customer warranty, upcoming major maintenance. An impairment recognises the loss in value of an asset: a doubtful receivable, unsellable stock, devalued securities.

For a customer receivable of 5,000 euros excluding VAT whose recovery becomes uncertain, an impairment is recognised on the net-of-VAT amount: debit 68174 (impairment charges on receivables) against credit 491 (impairment of customer accounts), for 5,000 euros. VAT is not impaired as long as the receivable is not definitively lost.

The tax treatment deserves particular attention: a provision is deductible only if it is clearly specified, probable and linked to events in progress at year-end. We detail the conditions in our file on provisions for risks and charges.

3. Accruals of expenses and income#

This is the most time-consuming family and the one most exposed to omissions. It mechanically applies the independence of accounting periods.

Example of a prepaid expense: an insurance premium of 1,200 euros covering twelve months, paid on 1 October for a year ending on 31 December. Nine months relate to the following period, i.e. 900 euros: debit account 486 and credit account 616 for 900 euros, to neutralise the unconsumed fraction.

For tax purposes, accruals rest on the principle of acquired receivables and certain debts in their principle and amount at year-end (French tax doctrine, BOFiP). An expense that is merely possible falls under provisions, not accrued expenses.

4. Inventory and work-in-progress valuation#

At year-end, the opening stock is reversed and the closing stock is recognised, so that the change in stock appears in the result. At inventory, stocks and work-in-progress are valued unit by unit or category by category under article 214-22 of the French General Accounting Plan (regulation ANC 2014-03, version in force in 2026).

Valuation is at acquisition cost for purchased goods and at production cost for manufactured goods. The methods allowed for interchangeable goods are the weighted average unit cost (WAUC) and first in, first out (FIFO). The last in, first out (LIFO) method is prohibited by the French General Accounting Plan.

Stock whose realisable value is below cost must be impaired, in line with the prudence principle. This is a point the tax authorities watch closely during an audit, particularly in slow-rotation sectors or those at risk of obsolescence.

In the files we take over, the gaps almost never come from depreciation, which is mechanical and well supported by tools. They come from forgotten accruals and understated impairments.

The most frequent underestimated risk is the unrecorded accrued expense: commissions, paid leave and the associated social charges, energy or subcontracting invoices for December arriving in January. Each omission inflates the result and the tax due, then creates a pendulum effect the following year when the actual expense is booked.

Conversely, we regularly see impairments on receivables recognised too late, sometimes several years after the doubt arose, which weakens the true and fair view and complicates the tax treatment of the final loss.

The boundary is not always obvious, and the right choice depends on the degree of certainty at year-end.

When the commitment is certain and the amount reliable, it is an accrued expense. When real uncertainty remains over existence or amount, it is a provision, with a reinforced justification requirement for tax deduction.

1. Review the general ledger and reconcile third-party accounts to isolate anomalies.
2. Prepare the fixed-asset schedule and calculate depreciation charges.
3. Carry out the physical inventory of stock and value it under the chosen method.
4. List doubtful receivables and recognise the necessary impairments.
5. Identify probable risks and charges to post justified provisions.
6. Identify expenses and income belonging to the period but not yet recorded (accruals).
7. Adjust prepaid expenses and deferred income.
8. Produce the post-inventory ledger and trial balance, then the balance sheet and income statement.

This work then feeds the accounting entries file (FEC), which the tax authorities can request during an audit. A well-kept closing file, with its calculation evidence, is the best protection in the event of a review.

A pattern often recurs in the files we take over. A young company believes it has made a comfortable profit based on its year-end cash position. At inventory, accrued expenses (social charges on bonuses, accrued paid leave, December invoices) and a receivable impairment bring the result down to a far more modest level.

The owner did nothing wrong: they were thinking in cash terms, not accrual accounting. That is exactly what adjusting entries correct, which is why a checkpoint before closing avoids unpleasant surprises and poorly calibrated remuneration decisions.

Closing operations are generally carried out by the chartered accountant, based on the supporting documents and physical inventory provided by the company. The owner remains responsible for preparing the accounts; the firm brings the accounting and tax technique and secures the justification of each entry.

In our bookkeeping and accounts review engagements, this work is centralised in a documented review file, shared with the client through the MyUnisoft accounting portal to streamline the collection of closing documents.

• Adjusting entries match each expense and income to the right period and give a true and fair view of the company's position.
• Four families structure this work: depreciation, provisions and impairments, accruals, and inventory valuation.
• Forgotten accruals and late impairments are the most frequent sources of error, more so than depreciation.
• The provision / accrued expense boundary depends on the degree of certainty at year-end and drives tax deductibility.
• Stocks are valued unit by unit or category by category (article 214-22 of the General Accounting Plan), at WAUC or FIFO, never LIFO.
• A justified closing file protects the company during an audit, the FEC being one of the first documents requested.