Year End Balance Adjustments: The Missing Piece in Your Bookkeeping

When most small business owners or sole traders think about finishing the year’s accounts, they picture printing reports from their bookkeeping software, adding up income and expenses, and sending it all off to HMRC. Job done, right? Well… not quite.

There’s one crucial step that often gets overlooked — year end balance adjustments. They don’t sound very exciting (and to be fair, they’re not), but they are the missing piece that makes sure your accounts are accurate and your reports reflect the real financial position of your business.

What are year end balance adjustments?

Think of your accounts as a photograph of your business. Throughout the year you’re snapping away — recording sales, logging expenses, matching bank transactions. At the end of the year, before you frame the picture, you need to touch it up. That’s where year end adjustments come in.

They’re the tweaks that ensure your accounts reflect reality, not just what’s gone in and out of the bank. They adjust the balances on certain accounts so that things like stock, bills not yet paid, or costs paid in advance are properly recognised.

Why they matter

Without year end adjustments, your accounts can be misleading. You could:

• Show too much profit because you haven’t recorded bills you still owe.

• Show too little profit because you’ve included costs that relate to the following year.

• End up with accounting software reports that don’t match your official year end accounts.

And when HMRC comes calling, you want your numbers to add up.

Common examples of year end adjustments

Here are some of the most common ones you’ll come across:

• Prepayments – You’ve paid for something upfront (say, 12 months’ insurance in January). Only three months belong in this financial year; the other nine are a prepayment carried into the next.

• Accruals – You’ve had the benefit of a service (e.g. accountancy fees or utilities) but haven’t had the bill yet. An accrual makes sure the cost is included in the right year.

• Stock adjustments – If you hold stock, its value at year end affects your profit. Adjusting stock ensures your cost of sales figure is correct.

• Depreciation – Large items like vans, machinery, or computers lose value over time. Depreciation spreads the cost across several years.

• Director’s loan or drawings – Balancing what you’ve taken out of the business against profits.

• Payroll reconciliations – Making sure your wages, PAYE, and pensions are lined up with what’s been reported to HMRC.

Each one makes sure your accounts reflect the true state of play at year end.

What happens if you skip them?

Here’s where it gets tricky. Some firms leave clients to handle these adjustments themselves if they do their own bookkeeping. The problem? They’re not straightforward, and missing them leads to inaccurate accounts.

• Your reports in bookkeeping software will never quite match the official accounts.

• You risk paying the wrong amount of tax — either too much or too little.

• Banks or lenders looking at your figures could get the wrong impression.

• HMRC could raise questions if something looks out of place.

  
  

Example: Before and after adjustments

	Before adjustments	After adjustments
Sales	£100,000	£100,000
Expenses (recorded)	£60,000	£60,000
+ Accruals (unpaid bills)	–	£3,000
– Prepayments (next year’s costs)	–	(£2,000)
– Depreciation	–	£4,000
Profit shown	£40,000	£35,000

As you can see, without adjustments your accounts look healthier than they really are. That might feel good in the short term, but it paints a misleading picture.

Enter Dave…

Picture this: my mate Dave runs a small construction business. He’s proud of his tidy bookkeeping and was convinced he’d made a bumper profit last year. New van, plenty of stock in the yard, a few invoices still waiting to be paid — but the software looked healthy, so he cracked open a celebratory pint.

Fast forward to year end. When the accounts were adjusted, suddenly the “profit” wasn’t as big as Dave thought. The stock on hand reduced his cost of sales, the unpaid supplier invoices knocked his bottom line, and depreciation on the van chipped away at the total. Dave hadn’t done anything wrong — he just hadn’t made those balance adjustments.

The moral? Without year end adjustments, your books can tell you a story that isn’t quite true.

How adjustments are handled

For us, making year end balance adjustments is part and parcel of preparing accounts. We don’t expect clients to know how to handle prepayments, accruals, or depreciation — that’s our job.

Unfortunately, not every firm takes the same approach. Some prepare year end accounts separately but don’t put the adjustments back into the client’s bookkeeping software. That leaves the records out of sync, which can cause confusion the following year.

Done properly, adjustments are fed back into your software so everything matches: the reports you see throughout the year, and the figures filed with HMRC or Companies House.

Final thoughts

Year end balance adjustments aren’t glamorous, but they’re essential. They bridge the gap between the everyday bookkeeping you do and the official accounts that HMRC relies on.

Handled correctly, they keep your software accurate, your tax bill fair, and your accounts credible. Skip them, and you risk misleading reports, tax problems, or worse.

The good news? You don’t need to be an expert in accruals, prepayments, or depreciation — that’s what we’re here for. Year end balance adjustments may be the missing piece in your bookkeeping, but with the right support, they’ll never be a mystery.