Managing a small business can entail many moving parts, and at year’s end, it becomes increasingly important to have your financial ducks in a row. Year end accounting is not just closing the books. It is about preparing your business for tax season, going over compliance issues, and laying the groundwork for the coming year! To make things less cumbersome, we created a checklist to follow for closing your year-end books…
1. Organize and Review Financial Records
The first part of year-end accounting is to compile all of your financial records and to ensure each one is accurate and complete. You will want to include:
- Bank and credit card statements
- Receipts and invoices
- Loan and debt statements
- Payroll reports
When you begin the process of reconciling accounts, you will verify that there are no discrepancies between your records and bank account balances. Correct anything that is incorrect or missing before you proceed.
2. Feasibly verify accounts payable and receivable
Unpaid bills or unresolved invoices can greatly impact your year-end balance. To be prepared at year end, you will want to:
- Review accounts payable to be certain you paid all bills.
- Contact your past-due invoices to improve year-end cash.
- After talking to your accountant, determine whether you need to write off uncollectable debts.
By having your accounts receivable and accounts payable reconciled, you will have an accurate representation of your overall financial health.
3. Verify Payroll
Payroll is often a business’ largest expense, particularly for small businesses. At year-end, make sure that:
- All employee hours and benefits have been recorded.
- All payroll taxes have been reported and remitted.
- All independent contractors have been accurately tracked for 1099s (or other local equivalents).
Proper payroll recordkeeping enables you to avoid penalties and lays the groundwork for easy tax filing.
4. Assess Business Expenses
Review your expenses sections and ensure they are still properly classified. Look for:
- Expenses related to office supplies, business travel, marketing expenses, and utilities that are tax-deductible.
- Applicable capital expenses that you need to depreciate.
- Personal expenses that may have ended up in the business expense box inadvertently.
Accurate expense tracking can help you realize deducted expenses and reduce total taxable income.
5. Perform Inventory (if applicable)
If your business sells products, year-end inventory is crucial. You do a physical count of inventory and compare it to your record. This is key for identifying:
- Shrinkage (loss, theft, or damage).
- Adjusting your cost of goods sold (COGS).
- Providing a figure for accurate financial statements for tax purposes.
6. Review Tax Responsibilities.
Taxes can be intimidating, but getting prepared early makes them easier. At year-end you should:
- Estimate your overall business tax liability.
- Ensure you are up to date with your quarterly estimated taxes.
- Gather items you need for deductions and credits.
Talk with your accountant about ways to defer tax, such as making a contribution to a retirement account or purchasing equipment prior to year-end.
7. Review Financial Statements.
After all adjustments are made, review the following key statements:
- Income Statement (Profit & Loss). This document details your revenue, expenses, and profitability.
- Balance Sheet. This document summarizes assets, liabilities, and equity.
- Cash Flow Statement. This document shows liquidity and describes how money is used in your business.
In conclusion, financial statements give insight into your business performance and can help shape your strategic decisions for the new year.
8. Back Up and Secure Data.
Data security is sometimes not a thought for small business accounting. You want to ensure that:
- Your accounting records are all backed up digitally and secured.
- Personal information is protected, whether it’s encrypted, deleted, or stored on secure cloud services.
- Access is limited to authorized persons only.
9. Meet with Your Accountant or Bookkeeper
Even if you do 99% of the bookkeeping, a professional accountant will find errors and help with tax planning. Having a year-end meeting provides an opportunity to:
- Review your overall financial position.
- Discuss regulatory changes coming in the next year.
- Plan for growth, funding, or major purchases in the upcoming year.
10. Do Your Planning for the New Year
Finally, you can look at the year-end review as a launch into the new year. Some things to consider:
- Identifying your financial goals.
- Reviewing your budget.
- Exploring new accounting software or tools for efficiency.
By being proactive, you can start the new year with knowledge and more confidence.
Closing your books does not have to be stressful. Using this small business accounting checklist will help you remain compliant and gain insights from your company’s performance. A proper year-end accounting process can pave the way for a smoother tax filing process, better decisions, and a better financial future.