Tackle year end like a boss
Every January we promise ourselves we’ll do things better this year. If you run a business, you might resolve to stay on top of your records all year so you don’t have to panic at tax time. But what if, despite your best intentions, tax season is looming and your records are a total mess? Here are four key steps to follow, along with some insight on using this exercise as an opportunity to better understand your business.
Step 1: Catch up on your bookkeeping
The first thing you need to do to get ready for tax time is get your bookkeeping in order. You’ll need to gather up all your receipts and bills from purchases you’ve made during the tax year, as well as your customer invoices and bank account statements.
Update your expense records
First, make sure all of your spending is recorded in your accounting system. Pay off any outstanding bills right away, and make note of any expenses that you’ve used, but haven’t been charged for yet, like phone, gas and electricity bills. Also make note of any expenses you’ve already paid for but haven’t yet used, like insurance, rent, and some kinds of equipment.
Don’t forget to include any expenses that you pay for and also use for your business. For example, if you work from home, your rent, insurance, utilities, and repairs would count, as would your car if you use it for your business. Split the total cost between business and personal use. For home office expenses, this is usually calculated based on the work square footage vs total square footage of your home. For your car, keep logs of the business mileage you drive.
Update your income records
Like with expenses, make sure all your sales deposits and receipts are entered into your accounting system. Check for billable sales or services that you haven’t invoiced for yet and send those invoices out. Follow up on any outstanding invoices and send final payment reminders to late customers—start calling if you need to.
Make note of any customer deposits you’ve received for work you haven’t done yet, as well as work that you’ve started but can’t invoice for just yet.
Reconcile your bank and credit card accounts
Make sure you’ve properly categorized and verified all your income and expenses, and that any sales taxes are accounted for within each transaction. Then reconcile your bank and credit cards to make sure all of the transactions in your monthly statements appear in your accounting records, and that there aren’t any duplicates.
Step 2: Make year-end period adjustments
Now that you’ve updated your income and expenses, it’s time to tackle year-end period adjustments. These adjustments are journal entries made to your business accounts at the end of a period so your financial statements accurately reflect your business performance.
In accounting, we break up the life of a business into segments so that we can more easily follow its progress. A period can be any duration, but most companies use a fiscal year. This is so you can close out the books at the end of that fiscal year, and properly preserve the connection between expenses and the revenue they generate.
Step 3: Convert accrual to cash
There are two standard ways that you can do your accounting: accrual-based and cash-based. Accrual-based accounting means you recognize income and expenses when they are earned or incurred, as opposed to cash-based accounting, where you recognize them once they’re received or paid.
Under the accrual method, when you make a new sale you record the sale as income even if the client isn’t going to pay for a few weeks. Under cash-based accounting, you wait until the client pays you before you record that sale. Similarly, you record your January phone bill as an expense in January under accrual accounting, but with cash accounting you record it in February once it’s paid.
Step 4: Send your records to your accountant
Once you’ve caught up on your bookkeeping, made the necessary adjustments, and converted your income and expenses from accrual to cash basis (if necessary), you’re ready for year end. The final step is to pass your books along to your accountant to work his or her magic.
Year end is a crazy time for accountants too, so you’ll want to make the transition as smooth as possible. Think of your accountant as someone who’s there to check your work and make recommendations, not to do bookkeeping for you; it’ll reduce the number of questions you have to answer, and hopefully result in a lower bill as well.
Make sure you share the following reports with your accountant:
1. Trial balance
2. Balance sheet
3. Profit & Loss
4. Period matching adjustment journal entries
Your accountant may also ask for a copy of the general ledger report, which shows all transactions for the year. This helps them track down any mysterious balances or activity in your accounts.