Business owners should be aware of some basic accounting practices to best organize themselves for the end of the fiscal year. Near the end of an accounting period, businesses must be prepared to close their books. At a minimum, this should be done annually to arrange financial statements and file an income tax return. The following procedures will help you tidy up your accounting ahead of the new year.
First, it is imperative to ensure all available income and expense reports are recorded and current. Invoice any unbilled orders and projects as soon as possible. That way, you shift the responsibility of communication from your business to your clients, freeing up valuable time and resources.
Follow up with all clients who have yet to pay any invoices. You may be able to easily email reminders if you use an accounting or bookkeeping program. It’s always beneficial to do this early, as any unpaid bills will cause issues moving forward. It’s your responsibility to collect payment from clients, so make a significant effort to resolve any outstanding balances.
Catch up on recording and categorizing annual expenses. Entering data into your accounting software will keep you on-track and will assist your accountant in identifying any tax-deductible expenses. Staying current on your expenses over time will minimize end-of-year stress, which is crucial. The less time you spend playing catch up, the better.
In a perfect world, this would be a common practice. Unfortunately, many small business owners don’t have the luxury of multiple bank accounts. While this is understandable, it makes it much more difficult to distinguish between business and personal expenses.
Clearly separating these expenses will drastically reduce the chances of an IRS audit because explicit deductions won’t overlap. Bookkeeping software often has tools which allow one to isolate different categories. Reach out to your accountant if you’re uncertain about an expense- they will be able to answer most questions.
Before closing your books for the fiscal year, make sure to settle all current vendor and contractor debts. Paying debts early will maximize organization, minimize miscommunication, and give you peace of mind in the coming months. Write a detailed note of any outstanding balances before continuing.
After settling debts and properly recording all income and expenses, double-check for errors. Compare your records to official bank statements to make sure the totals match. Address any mistakes or discrepancies as soon as possible.
It is best to reconcile business accounts frequently to reduce stress and streamline this process. Try to do this monthly, or at least quarterly. That way, it’s easier to locate and alleviate potential problems.
Review all present employee and contractor information for the year to verify that everything you have on file is 100% correct. Contact information must be error-free before sending out 1099s and W-2s for the approaching tax season. Be proactive in this regard- consider sending an email or memo to your team asking for any updates.
It’s important to count your inventory at the beginning and end of each year. This may seem like a no-brainer but remember that several tax forms require inventory totals. Save this step for the day you close your books. That way, you won’t have to make any last-minute adjustments if something changes.
Using your accounting or bookkeeping software, run Balance Sheet and Profit & Loss reports. Double-check both reports to verify that the information is correct.
Finally, create a backup file for the year. This is an excellent end-of-year habit. Nobody wants to lose any important data from previous year, and your accountant will appreciate the effort, especially when it comes to filing taxes.