It’s that time of year again. Planning commences as the year draws to a close. Preparing your accounting records for year-end will not only ensure you put your best foot forward in the new year, but it will also help you close out last year without a headache.
There are several items to consider as you prepare for year-end planning.
Balance Sheet Checklist
- Make sure your assets match your liability and equity on your balance sheet.
- Perform bank reconciliation for all cash, credit card and loan accounts through December/year-end. Are there any checks or deposits that have not cleared? Are these items duplicates? Do you need to void and resend a check? Do you need to review these items as possible unclaimed property? Where did the money for the uncleared deposit go if it didn’t hit the bank account?
- If you are on a cash basis, make sure any checks written in December that have not cleared are entered.
- If you are on an accrual basis, make sure all customer invoices and accounts payable are entered. This ensures you’ve captured all income and expense items related to the current year.
- Gather copies of all fixed asset purchases and related loan documents, if any were financed. Be sure to capitalize any fixed assets in accordance with your capitalization policy.
- Look at your accounts receivable aging. Will everything be collected? Do you have any bad debt items that need to be written off or sent to a collection agency?
- Adjust inventory, prepaids, security deposits, etc. as needed.
- Look at your accounts payable aging. Is there anything that you will not be paying or that was entered twice?
- Look at your liabilities. Do your loan balances agree to your balance sheet? Have you appropriately recorded interest and fees as expenses?
- Has your PPP loan been forgiven or is it still outstanding? Be sure it is recorded accordingly.
- Make sure the December sales tax and payroll liability balances match your January payments.
- Did you participate in the payroll tax deferral? Be sure to include the liability on the balance sheet.
- Did you receive the Employee Retention Credit? Be sure to include the receivable on the balance sheet.
- Were distributions to owner(s) or contributions from owner(s) recorded in the correct equity accounts?
- Does the retained earnings balance agree to the last year ending balance? Do prior year distributions need to be closed to retained earnings still?
Profit and Loss Checklist
- Do a quick check through your revenue. Are there any negative amounts in revenue accounts that should be entered as expenses or that should go to a discount/refund, a cost of goods sold account?
- Review your revenue accounts for any income, grants or receipts that were related to COVID-19 and might not be taxable for federal or state purposes (the taxability might not be the same at the federal and state level). It is a good idea to record unusual or infrequent income in a different account than your standard revenue accounts.
- Compare your profit and loss statement to other time periods to make sure it appears complete and accurate. Compare to the previous month and the previous year reporting.
- Review your cost of goods sold account for the year as a percentage of revenue. Review your expense items for the year as a percentage of revenue. Do these accounts seem reasonable? Compared to other time periods, does the percentage appear similar, or at least within a range?
- Gather any 1099s received. Compare the sum of form amounts to your revenue accounts. Do you show more or less revenue than the form totals? Note 1099 amounts might include sales tax or tips.
- Review your expense accounts and determine if any 1099s should be prepared. Be sure you have W-9s for vendors that will need to receive a 1099 from you.
- Prepare copies of your W-2s and W-3s and send them to your employees and the Social Security Administration in a timely manner.
Learn more about how to properly prepare your information returns.
- Remember that any single expense purchase over $2,500 should likely be a fixed asset. The safe harbor threshold for capitalization is $2,500. For instance, if you bought three computers that totaled $2,600, they would remain an expense item if any one computer is not over $2,500. This threshold may be different depending on your capitalization policy.
- Look through your miscellaneous or uncategorized income and expense accounts. Code to a proper account unless very minimal.
- Separate officer health from employee health insurance. If you are an S corporation, be sure to appropriately include this amount on the W-2s for the owners as required.
- Review your charitable contribution accounts. Reclass any promotion/sponsorship items to advertising. Remember, only donations to qualified organizations are deductible as a charitable expense. Also, political contributions are not deductible.
- Review your meals and travel accounts. Be sure to separate any entertainment expenses into a separate account. It is a good idea to separate meals into a separate account as well.
Year-End Data Checklist
- If you are using accounting software, making a backup after year-end is a good idea. A more frequent backup is recommended. Be sure to store a copy of this backup offsite.
- If your accounting software has a closing process, be sure to complete that process. For example, set a closing password, so that changes cannot be made in previous periods for closed periods. Also, close income to equity accounts so you can start the next year fresh.
- Year-end is a good time to prepare your documents for your document retention process. Do you scan and electronically store documents for the required length of time? Do you file your data in boxes and place those in storage? Year-end is a good time to review and update your document retention process.
The Importance of Preparing Your Books for Year-End
These are just a few of the items to consider as you prepare for year-end. Make sure you take the time to gather the correct information and talk with your business advisor and/or accountant so you can close out year-end and start 2023 right.
