Year-end Journal Entries Explained for SMEs

Year-end journal entries help ensure your accounts reflect accurate figures before financial statements are prepared. Without these adjustments, revenue, expenses, and asset values may appear higher or lower than they should, creating issues during tax submission and reporting.

This guide explains the most common year-end entries of depreciation, accruals, provisions, and prepayments and how they apply in practical business scenarios.

What is the Purpose of Year-end Journal Entries?

These adjustments ensure financial statements reflect the correct timing, value, and recognition of transactions.

Businesses record hundreds of transactions throughout the year. Some occur gradually over time; others have timing gaps between service delivery, billing, or payment. Year-end entries correct these gaps so accounts match the true economic activity.

They also support audit requirements and compliance with accounting standards by ensuring assets, liabilities, and expenses are accurately valued at the end of the financial period.

Read more: Year-end Closing Checklist for SMEs (Overview)

How Does Depreciation Work as a Year-end Adjusting Entry?

Depreciation allocates the cost of fixed assets over their useful life.

Many local SMEs purchase items like POS machines, delivery vehicles, kitchen equipment, office computers, or construction tools. These cannot be expensed in full during the year of purchase. Depreciation spreads their cost over several years, helping businesses match asset usage with revenue.

For example:

• A café depreciates its espresso machine over 5 years.
• A retailer depreciates barcode scanners and display shelves.
• A logistics provider depreciates motorcycles used for daily deliveries.
  

Example Entry
Debit: Depreciation Expense
Credit: Accumulated Depreciation

This keeps reported profit realistic and prevents asset values from appearing inflated.

Why Are Accruals Necessary at Year-end?

Accruals record expenses or income that have occurred but are not yet billed or paid.

Many services are consumed before an invoice is issued, utilities, cleaning, freelance work, monthly subscriptions, or staff bonuses. If these are not recorded in the correct period, expenses are understated and profit appears higher than it should.

Common examples:

• Utilities: TNB or Syabas bills arriving after month-end.
• Marketing Agencies: Work completed but invoice received in January.
• Transport & Courier Fees: Logistics charges for December deliveries billed the following month.
• Staff Bonuses: Earned during the year but approved and paid in the next period.

Example Entry (Expense Accrual)
Debit: Expense
Credit: Accrued Liabilities

Accruals maintain accurate reporting and support better forecasting, cash-flow planning, and tax reporting for the coming year.

How Do Provisions Work in Year-end Accounts?

Provisions set aside amounts for future obligations that are probable and can be reasonably estimated.

Unlike accruals, which relate to services already received, provisions address expected outflows. Common examples include warranty claims, legal liabilities, or doubtful debts.

Provisions help businesses prepare for predictable risks by recognising potential costs early, preventing sudden expense spikes in later years.

Examples by industry:

• Electronics Retailers: Provision for warranty claims on devices sold.
• Construction Firms: Provision for rectification work required after project handover.
• Professional Services: Provision for doubtful debts when clients delay payment beyond agreed terms.
• F&B Operators: Provision for expired stock or spoilage during year-end stocktake.

Example Entry
Debit: Expense (such as, Provision for Warranty)
Credit: Provision Liability

This ensures the balance sheet reflects realistic future commitments so that businesses can prepare for predictable risks.

Further reading: Deferred Tax Liabilities in Malaysia: Meaning, Examples & Accounting Treatment

What Are Prepayments and Why Are They Adjusted at Year-end?

Prepayments record expenses paid in advance that apply to future periods.

Malaysian SMEs often pay for annual or multi-month services upfront. Year-end adjustments reclassify unused portions as current assets so expenses stay accurate.

Examples:

• Insurance Premiums paid annually for business premises or vehicles.
• Rental Deposits for retail lots or shared offices.
• Software Plans such as accounting systems, POS subscriptions, or e-commerce platforms billed for a full year.
• Annual Maintenance Contracts for air-conditioning, machinery servicing, or IT systems.

Example Entry
Debit: Prepayments
Credit: Expense

This keeps monthly and yearly reporting consistent and avoids overstated expenses.

Conclusion: Year-end Journal Entries Strengthen Financial Accuracy

Accurately recording depreciation, accruals, provisions, and prepayments ensures your financial statements reflect a true and clear picture of your business performance. These journal entries aren’t just about compliance, they help you:

• Enhance transparency for stakeholders
• Support strategic planning and cash flow management
• Start the new financial year confidently on stable ground

For SMEs looking to stay informed on accounting best practices, trends, and practical tips, keeping up with business insights from trusted sources like Press, a digital PR agency in Malaysia that publishes relevant news and articles that can provide valuable guidance and help you make smarter financial decisions.