If you are like many small business owners/managers, you’ve maintained your books throughout the year, but you’ve saved the deep cleaning for after the end of the year. You’ve had to pay bills and collect from customers, so your payables and receivables should be reasonably current. Each month you’ve used your accounting software to do your bank reconciliations and run financial statements to see how you’re doing
However, now you need to take care of small issues that have accumulated over the past year. Some of your products have inventory balances on the books that don’t match what you have on hand. Some of your vendor balances need to be cleaned up. There’s that credit card charge from back in March that is still uncategorized, and you haven’t taken the time to figure out what it was.
The day of reckoning is almost here, which is when you hand your books over to your tax accountant. It’s time for a deep cleaning.
And remember: taxes are only one reason to keep clean books. Your numbers tell the story of how your business did over the past year. They can provide insight into how you can do better in the coming year. Where did the cash come from? Where did it go? In what ways was cashed wasted and in what ways was it invested well?
Here’s a checklist to help you with that deep cleaning:
Account reconciliations. Are there any uncleared items in bank account or credit card registers that need to be fixed? Any checks entered but never sent? Any transactions booked to the wrong account?
Account categories: Are your transactions categorized properly? Is anything still in uncategorized or miscellaneous accounts? Does your chart of accounts provide the insight you need to gain from your financials? Do accounts need to be added or merged? Do any transactions need to be recategorized?
Payables. Do your vendor accounts match your vendors’ records? Do you need to clean up your Open Bills report?
Receivables. Do your customer accounts match your customers’ records? Did you send statements to customers with amounts owing? Do you need to clean up your Open Invoices report?
Inventory. Did you do a physical count at the end of the year, and do your inventory levels on the books match what you have on hand? Do you have obsolete or damaged inventory that needs to be written down or off?
Payroll and 1099s. Hopefully you outsource your payroll to a provider that handles all tax filings. If so, have you verified that all required filings and payments have been made? Did you file 1099’s that are due by January 31, or are you ready to file 1099’s that are due later? Do you have W9’s on file for all vendors you paid over $600 for services?
Sales tax. Did you, or are you ready to, file sales tax returns for sales tax collected through December? Is each periods' filing still accurate, or have you made changes to past periods that necessitate revised filings?
Investments. Have you correctly recorded any investments you have made? Do you need to make any adjustments based on changes in value?
Fixed Assets. Have you properly recorded all fixed assets you purchased last year? Have you capitalized what should be capitalized and expensed what be expensed? Have you accurately recorded depreciation for the year? You may leave this to your tax accountant and use tax depreciation as your book depreciation, which is normally fine.
Loans. Do the loan balances on your books match the creditor records, or do you need to made adjustments for interest or any other reason?
Equity. Have your properly recorded any equity transactions, such as shares sold or dividends/distributions paid?
Final review. Review each item on your Income Statement for the year and Balance Sheet as of December 31 and make sure it looks correct. Dig into anything you’re not sure about.
This kind of deep cleaning is not the most enjoyable for normal people, but it’s an important activity at this time of year.
If you feel like you’re in over your head, if you’re doing okay but could use help with some more complicated areas, or if you just don’t want to or don’t have time to deal with it, reach out to an experienced accountant. They are the abnormal people who actually enjoy this kind thing!
I’m one of those abnormal people. I love the process of creating order out of chaos (or, cleaning up little messes if that describes your books better). I and my team at Venture CFO would be happy to help!