12 Entries Small Companies Forget Before Closing the Books

A small company's accountant usually keeps the books well during the year: sales, purchases, bank, GST. What gets left out are the year-end closing entries, the adjustments that turn a cash-driven trial balance into accounts on an accrual basis. Section 128(1) of the Companies Act, 2013 requires the books to be kept "on accrual basis and according to the double entry system of accounting", so the auditor cannot treat these entries as optional. Below are twelve that are often missed in small-company files. For each one you get the journal entry, the standard or law behind it, and how the auditor notices it is missing. Send it to the client's accountant in February, not in August. Law as at 30 October 2026; figures are illustrative. Tax references are to the Income-tax Act, 1961, which governs FY 2025-26. From tax year 2026-27 the Income-tax Act, 2025 applies, where, for example, section 43B is now section 37.

The 12 year-end adjustment entries at a glance

1–3: Expenses that belong to this year

1. Outstanding expenses. March's rent, electricity, telephone, professional fees, contract labour and salaries are often paid in April and booked then. The entry: Dr each expense, Cr "Expenses payable" (or the party, if the bill is in hand). The auditor's test is simple: count the months. If the electricity ledger shows eleven bills, or salary shows eleven payroll entries, the twelfth is missing. Payments in April and May against March bills, picked up in the search for unrecorded liabilities, show the same thing. Where tax has to be deducted on the expense, deduct it when the amount is credited to the party or to the payable account, not when it is paid.

2. Audit fee. This is the most predictable missing entry, because the auditor's own fee is usually paid after the audit, in the next year. Dr Auditor's remuneration, Cr Audit fee payable, for the statutory audit fee and, separately, any tax audit or other fees. Division I of Schedule III (General Instructions for the Statement of Profit and Loss, para 5(i)(j)) requires payments to the auditor to be shown as auditor, for taxation matters, for company law matters, for management services, for other services and for reimbursement of expenses. The auditor spots the gap from the engagement letter itself.

3. Bonus. AS 15 (para 17) requires the expected cost of bonus to be recognised when the company has a present legal or constructive obligation to pay it and the amount can be reliably estimated. Statutory bonus for the year, now under the Code on Wages, 2019 (in force from 21 November 2025, replacing the Payment of Bonus Act, 1965), and any performance bonus promised for the year, belong in this year: Dr Bonus, Cr Bonus payable. The tell is a bonus ledger that has entries only in October or at Diwali. For tax, bonus is allowed only on payment under section 43B, if paid by the due date of the return. A bonus provided but unpaid at that date is a timing difference that feeds entry 12.

4–5: Gratuity, leave and depreciation

4. Gratuity and leave encashment. Many small companies record gratuity only when an employee leaves. That is the cash basis, and AS 15 does not allow it. The entry is Dr Employee benefits expense (contribution to gratuity, leave encashment), Cr Provision for gratuity and Provision for compensated absences. The provision is split into a non-current and a current part.

What a Small and Medium-sized Company (SMC) gets under the Companies (Accounting Standards) Rules, 2021 is relief from parts of AS 15, not from the provision itself:

• It need not apply paras 11–16 to non-vesting accumulating short-term compensated absences, that is, leave that cannot be encashed on leaving.
• For defined benefit plans it need not apply the recognition and measurement rules in paras 50–116. But it "should actuarially determine and provide for the accrued liability", using the Projected Unit Credit Method and a discount rate based on government bond yields at the balance sheet date (para 78). The same applies to other long-term benefits such as leave carried beyond twelve months.

The option to use "some other rational method" (for example, assuming that all employees leave at the year end) is given by ICAI to non-company MSMEs (revised criteria applicable from 1 April 2024). It is not in the 2021 Rules for companies. For FY 2025-26, also check the effect of the labour codes in force from 21 November 2025: the wider definition of wages, and gratuity for fixed-term employees after one year. ICAI's FAQs of 26 December 2025 treat the resulting increase as past service cost. Under the full AS 15, vested past service cost goes to profit and loss immediately and unvested past service cost is spread over the vesting period (para 94). An SMC that uses the relaxation from paras 50–116 provides the actuarially determined accrued liability in full, so in practice the whole increase is charged in the year. The increase in leave liability is recognised immediately in either case. The auditor spots the gap when there is no actuarial report on file, or when the provision equals last year's figure. Our guide to employee benefits and finance costs under Schedule III sets out the note.

5. Depreciation. Depreciation is often passed, but on the wrong base. Schedule II, Part C, note 2 requires depreciation on additions and disposals pro rata from the date of addition or up to the date of sale. Para 3(i) limits residual value to 5% of original cost unless the difference is justified and disclosed. The common errors: a full year's charge on a machine bought in February; no charge on an asset capitalised from CWIP in March; a charge on an asset sold in June. The entry is Dr Depreciation and amortisation expense, Cr Accumulated depreciation (or the asset, if the books carry net values). The auditor recomputes the charge from the fixed asset register and compares it with last year's charge adjusted for additions. A depreciation figure that barely moved in a year of heavy additions is a flag in the CY vs PY 10-minute check.

6–7: Prepaid expenses and accrued interest

6. Prepaid expenses. Insurance, annual maintenance contracts, software subscriptions and advance rent paid for a period crossing 31 March are often expensed in full. Dr Prepaid expenses, Cr the expense, for the unexpired part. Example: a fire policy for ₹72,000 taken on 1 January 2026 for a year has nine months unexpired at 31 March 2026, so the prepaid amount is ₹54,000. The mirror entry, income received in advance (Dr Income, Cr Advance from customers / Unearned revenue), follows the same logic for AMC or subscription income billed upfront. The auditor spots it when the insurance expense swings with the renewal month rather than with the cover.

7. Interest accrued on fixed deposits. AS 9, para 13 recognises interest "on a time proportion basis". On cumulative FDs, many accountants book interest only on maturity. Dr Interest accrued on fixed deposits, Cr Interest income, and Dr TDS receivable, Cr Interest accrued, for the tax the bank deducted on the accrual. Example: an FD of ₹10,00,000 at 7.2% opened on 1 October 2025 has ₹36,000 accrued at 31 March 2026 (6 months, simple interest for illustration). The auditor spots it from Form 26AS / AIS, where the bank's interest figure is higher than the books, and from the FD certificate or the bank's interest certificate.

8–10: Stock, debtors and foreign currency balances

8. Closing stock at the lower of cost and NRV. AS 2, para 5: "Inventories should be valued at the lower of cost and net realisable value." The value in the books is a cost figure. Software cannot know that an item is damaged, obsolete or selling below cost after the year end. Dr Changes in inventories (or a separate write-down ledger), Cr Inventories, for the shortfall. The auditor compares closing stock rates with sale prices after the year end, looks at items with no movement for a year, and reads the physical verification notes. Clause 3(ii)(a) of CARO 2020, where it applies (it does not apply to a small company), also requires a report on discrepancies of 10% or more in the aggregate for each class of inventory. See inventories under Schedule III for the note.

9. Allowance for doubtful debts. Small companies rarely provide for doubtful debts; they write off when the customer is gone. Division I of Schedule III sub-classifies trade receivables as secured, considered good; unsecured, considered good; and doubtful, and requires the allowance for bad and doubtful debts to be disclosed separately. Dr Provision for doubtful debts (P&L), Cr Allowance for doubtful debts, shown as a deduction from trade receivables. The auditor reads the ageing schedule: debts over a year old, nothing received after the year end, and customers in insolvency or litigation. For tax, only a debt actually written off is allowed (s.36(1)(vii)), so the allowance is a timing difference for entry 12.

10. Foreign currency restatement. AS 11, para 11(a): foreign currency monetary items (debtors, creditors, loans, foreign currency bank balances) are reported at the closing rate. Para 13: the exchange difference goes to profit and loss. Example: an import creditor of USD 20,000 booked at ₹84.00 (₹16,80,000) and restated at a closing rate of ₹85.50 (₹17,10,000) needs Dr Exchange loss ₹30,000, Cr the creditor ₹30,000. The auditor spots a missing restatement when foreign currency party balances in the ledger still show the invoice-date rate.

11–12: Tax, last

11. Current tax. AS 22, para 9: tax expense for the period, comprising current tax and deferred tax, is included in the net profit or loss. Work out the tax on the profit after entries 1 to 10 and under the regime the company follows (for example section 115BAA). Dr Current tax, Cr Provision for income tax. Set the provision off against advance tax and TDS only where the presentation rules allow. Interest under sections 234B and 234C goes to finance costs, not to current tax, and is disclosed separately (ICAI Guidance Note on Division I of Schedule III, para 9.8.1.3). The tell: advance tax and TDS receivable sitting in the trial balance with no provision, or a provision equal to the advance tax paid.

12. Deferred tax. AS 22, para 13: deferred tax is recognised for all timing differences, subject to prudence for deferred tax assets. The entries above create most of them: depreciation (book vs tax WDV), unpaid bonus and leave encashment (s.43B), unfunded gratuity (s.40A(7)), and the allowance for doubtful debts. Dr Deferred tax expense, Cr Deferred tax liability (or the reverse for an asset). The tell is a deferred tax balance carried unchanged from last year. The working and the note are in deferred tax presentation under Schedule III.

What the 12 entries do to profit: a worked example

A trading company shows a profit before tax of ₹42,00,000 in its unadjusted trial balance. The ten non-tax entries, with illustrative amounts:

Profit before tax falls by about 28%, before tax is even worked out. If overall materiality were set at 5% of the adjusted profit before tax, it would be about ₹1.5 lakh. Four of the entries exceed that on their own, and together they come to nearly eight times it. Left unadjusted, they would end up in the summary of uncorrected misstatements. Entries 11 and 12 are then passed on ₹30,33,000, not on ₹42,00,000.

Two more entries sit in other ledgers and are covered in their own guides. The first is the Rule 37 reversal of input tax credit where a supplier is unpaid 180 days from the invoice date, reversed in proportion to the unpaid amount with interest in GSTR-3B and re-availed when the supplier is paid (see GST ledgers set up for audit). The second is interest on delayed payments to micro and small enterprises under section 16 of the MSMED Act, together with the section 43B(h) disallowance (see MSME dues and section 43B(h)).

Pass the entries in this order: expenses and income first, then asset values, then tax. Get the client's accountant to send the revised trial balance with a list of the entries. Before you sign, run the 7 checks before signing the balance sheet so the statements, notes and trial balance still agree after the late adjustments.

Frequently asked questions

Sources

• Companies Act, 2013 — section 128(1), Schedule II (para 3(i), Part C note 2) and Schedule III (India Code)
• MCA — Companies (Accounting Standards) Rules, 2021 (AS 2 para 5, AS 9 para 13, AS 11 paras 11 and 13, AS 15 including SMC provisos, AS 22 paras 9 and 13)
• ICAI — Accounting Standards (AS 15, Employee Benefits, ICAI version with relaxations for non-company entities)
• ICAI Accounting Standards Board — FAQs on key accounting implications arising from the New Labour Codes (26 December 2025)
• PIB — Government makes the four Labour Codes effective (21 November 2025)
• CBIC — CGST Rules, 2017, rule 37 (reversal of input tax credit for non-payment of consideration)
• Income-tax Act, 2025 (Gazette, 21 August 2025) — section 37, deductions on actual payment

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