News & Insights

Getting to the end of the fiscal year with a balanced trial balance can feel like a major accomplishment. Debits are equal to credits, bank reconciliations are complete, and the books are ready to close.  

But a balanced trial balance doesn’t necessarily mean everything is correct.  

A trial balance can be perfectly balanced while still containing transactions posted to the wrong accounts, activity recorded in the wrong fund, old balances that should have been cleared years ago, or transactions that were never recorded at all.  

Before closing the books and beginning the audit, municipalities should proactively review their general ledger to identify errors, resolve outstanding issues, and strengthen the accuracy of their financial reporting. A few relatively simple review procedures can identify problems early and improve the reliability of the municipality’s financial information.  

Verify Beginning Fund Balances and Net Position 

Before reviewing current-year activity, municipalities should first confirm that they started the year with the correct balances.  

Differences in beginning balances can occur when audit adjustments aren’t posted, year-end entries are reversed incorrectly, or changes are made to prior-year accounting records after the audit is completed. These differences can carry forward from year to year if they are not identified and corrected.  

Management should compare beginning balances to the prior year’s audited financial statements to ensure prior-year adjustments were properly recorded and that no differences carried forward. Identify, understand, and reconcile any differences before focusing on current-year activity.  

This is especially important when there has been turnover in accounting personnel, a change in accounting software, or significant prior-year audit adjustments.  

Look for Unusual Account Balances 

One of the easiest places to start is simply reviewing the trial balance for accounts that do not look right.  

Revenue accounts normally have credit balances, while expenditure accounts normally have debit balances. Similarly, receivables generally have debit balances, while accounts payable generally have credit balances. Investigate any unusual account balances. 

Also pay attention to accounts that have remained unchanged for an extended period. An account carrying the same balance year after year should not automatically be assumed correct. Old receivables may no longer be collectible, payables may have already been settled, and other assets or liabilities may remain on the books simply because they have not been revisited. Management should be able to explain why significant balances remain outstanding and provide support for them. 

Municipalities should also review accounts that have changed significantly from the prior year, miscellaneous accounts that accumulate unusual transactions, and balance sheet accounts that have remained unchanged for an extended period. Large year-end journal entries and significant balances in infrequently used accounts may warrant additional review to ensure transactions were recorded in the appropriate account and fund.  

An unusual balance does not necessarily mean an error has occurred. However, management should understand why the balance exists and be able to support it.  

Year-end review should not simply ask, “Is the trial balance accurate?” It should also ask, “Does each balance make sense?” 

Reconcile Cash and Investments 

Cash is often one of the most significant accounts on a municipality’s financial statements, making accurate bank reconciliations an important part of the year-end close.  

Reconcile all bank accounts through fiscal year-end, and investigate any differences. Municipalities should also review outstanding checks and other reconciling items, particularly those that have remained outstanding for an extended period, to determine whether additional follow-up or an adjustment is necessary.  

Investments should receive a similar review. Investment balances should agree with year-end statements, and related investment income should be recorded in the appropriate accounts.  

This process can also help identify bank or investment accounts that may have been overlooked in the general ledger. Reconciliation is most useful when you resolve differences rather than carry them forward month to month.  

Review Interfund Balances and Transfers  

Interfund activity is another area where relatively small posting errors can create year-end headaches.  

If the General Fund reports an amount due from another fund, there should generally be a corresponding amount due to the General Fund recorded by the other fund. The same concept applies to transfers: a transfer out of one fund should have a corresponding transfer into another fund.   

Before closing the year, municipalities should compare due-to/due-from accounts and transfers across all funds. Investigate differences rather than carrying them into the next fiscal year.  

Old interfund balances are a common year-end issue. Interfund receivables and payables are typically temporary. Evaluate balances that have remained outstanding for multiple years to determine whether they remain valid and whether corrective action is needed.  

A simple schedule comparing interfund receivables, payables, and transfers by fund can make these differences easier to identify before closing the books.  

Identify Capital Assets, Debt, Leases, and Other Significant Agreements  

Not every year-end issue can be identified by reviewing account balances.  

Municipalities should consider what happened operationally during the year, including capital asset purchases and disposals, completed construction projects, new or refinanced debt, leases, and significant software agreements.  

These transactions can have financial reporting implications that are not always obvious from the general ledger.  

Maintaining a list of significant contracts and transactions throughout the year can make the year-end process much easier. Providing new lease and subscription agreements to the municipality’s accountant or auditor early can also help determine whether accounting standards such as GASB Statement No. 87 for leases or GASB Statement No. 96 for subscription-based information technology arrangements apply. 

Compare the Budget to Actual Activity 

The budget is more than a planning document. It can also help identify potential accounting issues.  

Before closing the books, municipalities should compare final budget amounts to actual revenues and expenditures.  

Significant or unexpected variances deserve additional attention. An expenditure account with activity but no budget, for example, may indicate that an amendment was missed or that an expenditure was charged to the wrong account.  

Municipalities should also ensure that budget amendments approved by the governing body have been properly reflected in the accounting system. Maintaining clear documentation of significant budget amendments throughout the year can make year-end review easier and help support budgetary reporting requirements.  

This review can help identify accounting errors, potential budget compliance issues, and other items that may warrant additional investigation before the audit begins.  

For more information on the budgetary reporting changes under GASB Statement No. 103, see our article, “GASB 103 Financial Reporting Model Improvements.” 

Review Grant Activity Before the Audit  

Grants can create additional year-end accounting and compliance considerations, particularly when a municipality administers multiple state or federal programs.  

At year-end, municipalities should reconcile grant revenues and expenditures, identify amounts spent but not yet reimbursed, and ensure supporting documentation is readily available. Municipalities receiving federal awards should also track expenditures by federal program to help determine whether Single Audit requirements may apply.  

Waiting until the audit to reconstruct a year’s worth of grant activity can quickly turn a straightforward reconciliation into a much larger project. Maintaining accurate records throughout the year helps municipalities identify reporting requirements early and makes the year-end process more efficient.  

For additional grant management best practices, including documentation, compliance, and monitoring considerations, see our article, “Three Key Considerations for Effective Grant Management in Local Governments.” 

Make Year-End Review Part of the Process 

A good year-end close involves more than confirming that debits equal credits. Reconciling beginning balances, investigating unusual accounts, reviewing interfund activity, documenting budget amendments, and reconciling grant activity can identify issues while the information is still readily available.  

Performing these procedures before the audit can reduce year-end adjustments and make the audit process more efficient. More importantly, it helps ensure management and the governing body rely on accurate financial information throughout the year. 

Get Support From Maner’s Governmental Accounting Experts 

Year-end accounting can become complicated, particularly when municipalities have limited staffing, new debt or lease arrangements, significant grant activity, or unusual transactions.  

Maner Costerisan’s governmental accounting and audit professionals work with municipalities throughout the year to help identify accounting and financial reporting issues before they become larger problems.  

Whether your municipality needs assistance with year-end accounting questions, financial statement preparation, audit readiness, or governmental accounting requirements, our team can help.