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Annual Closing Notice – Time to Start Preparing!

Posted by: Kristina Knut
Category: Tax and Regulations in China

Are you ready for the year-end closing?

The annual cut-off will be on the 31st of December 2018, and it’s approaching fast. The annual closing requires following certain procedures and to keep things running smoothly, both your paperwork and inventory must be checked. Below, we will go through the basics of the closing procedure – keep reading, so you can start preparing in time!

Take a look at our other posts: How can foreigners invest in the Chinese stock market?

Briefly – what is the annual closing

A year-end closing is an accounting procedure undertaken, as the name suggests, at the end of the year. The incentive of the procedure is to close out business from the previous year. This also involves carrying forward balances from the previous year, and opening posting accounts for the upcoming year. The closing procedures allow a company to reconcile expenses and revenues, to create profit and loss statements, but also other necessary filing documents and financial statements.

What is needed for a closing?

In order to complete the procedure, the accountants would need all the accounting documents and information of the current year. This includes documentation on all incomes, revenues, costs and expenses that belong to 2018. Legal documents, such as fapiao and receipts, must support the data. For revenues, costs and expenses for which there are no tax invoices issued yet, supporting documents are needed – these can be receipts, contract, purchase orders etc.

What belongs to the calendar year 2018?

Costs or expenses which belong to the calendar year of 2018 – remember to collect and present all the necessary fapiaos for the annual closing!

 

Same applies to revenues – track all the services rendered, and goods sold within the current year! The following situations would belong to 2018:

  • Shipped goods already received by clients, but still not invoiced.
  • Projects, which finished in late of December 2018, but for which you have not received the payment or fapiao yet.

Companies with a goods inventory must provide an accurate overview of their inventory status. This step usually involves a stock take with external auditors. What to be cautious of when it comes to inventory check:Goods in the inventory do not have an invoice yet and/or have not been paid for.

  • Goods in transit: one should be aware of the contractual ownership transfer date (FOB/CIF). Make sure, whether these goods must be registered in this or next year’s inventory.
  • Goods in consignation, but located at client’s site – these belong to your company and must be registered in the inventory.
  • Goods in consignation, located at your site – these still belong to your supplier and must not be registered in your inventory.

What if some of the documents or fapiaos are missing?

Pay close attention – all the transactions and entries must be supported by documents, e.g. contract, receipt, invoice, purchase order, etc. If the supporting documents are missing, accurate accounting entries are not possible.

  • Remember – expenses, which can’t be justified by proper supporting documentation, are not tax-deductible and are impacting your net profit.
  • In case an expense has been used to offset the salary of an employee, the tax authorities would requalify this expense as additional taxable salary for the employee and collect the corresponding individual income tax (the IIT). Remember – the employer is responsible for withholding and paying the IIT on the salaries & taxable benefits. In China, fines may run up to five times the amount of tax evaded, with an additional 0.05% interest per day.

The points above are basic suggestions to keep in mind for the upcoming annual closing. Remember, the above procedure is to provide a true representation of your firm’s financial performance. We suggest starting early to ensure all your paperwork is in check!

Need a trusted team of experts to help with your firm’s accounting procedures? Have a look at the services we offer and get in touch with us!

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Author: Kristina Knut

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