Well we let another year slip through our hands. It seems like only yesterday 2014 was just starting, and now it’s close to the end. This is the time of year you hear everyone telling you to accelerate or push out income and/or expenses based on your particular situation. But let’s face it, that’s not always easy and who wants to tell a customer not to pay until next year? So, what to do before the end of the year?
This is a great time to finish up 2014 and start the planning process for 2015. If you’re the type to do your own bookkeeping, or farm it out to one of your friends or family, it’s time to dig into the file and clean it up. Why pay your tax accountant or CPA $100 per hour or more when you can take these simple steps on your own. So roll up your sleeves and get cracking.
I’m a big proponent of monitoring the Balance Sheet. This seems counter intuitive because the Profit & Loss is what your year is based on, and the basis for paying taxes. So why bother with the Balance Sheet? The short answer is; because this is typically where all of the problems lie, and if you don’t review the Balance Sheet they remain undiscovered and become surprises at tax time.
Where to start?
• Bank Accounts – Make sure all of your bank accounts have been reconciled to your bank statements for the year. If you are using QuickBooks you should utilize the reconciliation process. The reconciliation report will list all outstanding checks and deposits. Review all old outstanding entries. Anything with a date prior to a month or so before the month you are reconciling. Some of the things to look for are;
o A check or deposit booked to the incorrect account.
o An entry inadvertently posted to the bank account.
o A check or deposit posted twice.
o If a check is valid, then contact the payee to determine if it was lost. If so, send a replacement check.
• Credit Card Accounts – As with bank accounts, use the QuickBooks reconciliation tool to reconcile your monthly statement. Review any credit card charge in the account that is dated prior to the month end statement date and is not on the card statement.
o An entry could be posted in error or the same entry posted twice.
o If you have more than one credit card it could be posted to the wrong account.
• Fixed Assets – If you purchased new equipment during the year for more than (say) $500, then you would typically capitalize it and depreciate the cost over a period of years. Therefore, review all of the entries posted to your fixed asset accounts to be sure they would qualify to be capitalized. There are times when checks or credit card charges are posted here that really should be on the Profit & Loss statement. Conversely, you’ll also want to review your expense accounts for equipment, furniture & fixtures, or software that was purchased during the year that really should be capitalized.
o Accumulated Depreciation – Typically you will only post an entry to this account once a year based on the amount deductible for tax purposes. Review this account for any other entries posted in error. Post the current year depreciation amount if not booked.
• Accounts Receivable – If you do not extend credit, then this account is not applicable. However, if you sell your goods and/or services on terms, then you need to review your Accounts Receivable to make sure the customer balances are correct. In fact, this should be done on a regular basis.
o Review account for unapplied customer payments or credits.
o Review the Un-deposited Funds account for to make sure all bank deposits have cleared these transactions.
o Review the AR Aging report to determine if an invoice should be written off.
• Accounts Payable – If you pay your bills as received, then this account is not applicable. However, if you post vendor invoices into your accounting system for payment at a later date, then you need to review your Accounts Payable to make sure the vendor balances are correct. In fact, this should be done on a regular basis.
o Review the account for unapplied vendor payments and credits.
o Review the account for small balances as they could be the result of an incorrect payment or credit. Fix as needed.
o Review the Unpaid Bills report to make sure they match your actual bills to be paid.
o Review your vendor list for all 1099 vendors and make sure you have a form W-9 on file and the tax number is entered into your accounting system.
• Prior Year Ending Balances – Ideally you should be posting all year-end adjusting entries provided by your tax accountant or CPA after the tax return is completed. This will help reduce the cost of preparing your current year taxes.
o Run the Trial Balance report using the prior year-end date and compare the results with the Trial Balance as provided by your tax accountant or CPA.
o Identify any discrepancies and determine if a correction is required. Not all tax related adjustments are required, so you need to understand the reasons why.
• Other Balance Sheet Accounts – Depending on your business and/or situation, you will have to review accounts such as Inventory, Prepaid Assets, Bank/Personal Loans , Deposits, etc. Review all Balance Sheet accounts to make sure you understand the purpose of the account, confirm the balance, and make any correcting entries as needed.
The bottom line is; a clean Balance Sheet should allow you to avoid surprises and help reduce the cost of tax preparation.