Accounting

A 39-Item Tax and Accounting Year-End Checklist for Your Small Business

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Keeping your accounting records up to date all year long is essential for any business so you can see exactly where your business stands and be able to make informed decisions based on clean numbers. 

At year-end, there are a few extra accounting tasks to finish so that your books are ready for the tax professional when tax time comes around. Plus, anything that wasn’t performed monthly or more often should now be completed at year-end. 

Here’s our list of items we feel every small business owner should consider doing or delegating at year-end.  Every company may not need to do every task – just the ones that apply to their business and their situation.

1. Bank Statement Reconciliation

All bank account balances on a company’s balance sheet should be reconciled to their corresponding bank statements. Hopefully, your main checking account is being reconciled monthly, but perhaps your savings or investment accounts are not reconciled as often. 

Don’t forget bitcoin if you’re into digital currency.

2. PayPal Reconciliation

 It’s easy to forget your PayPal account in the list of reconciliations to complete. It is effectively another cash account like your bank, and we list it here separately for emphasis.  If you’re using your PayPal account for both business and personal, get two accounts and use only the business account for your business transactions. Your accounting will be less expensive and more straightforward.

3. Petty Cash Reconciliation

Does your business have a petty cash account? If so, complete the reconciliation on the last day of your fiscal year. That will allow you to record all outstanding expenditures and replenish the account to its balance sheet amount. 

4. Credit Card Reconciliation

If you have credit card debt in your business, each credit card statement balance should be reconciled to the amount on your balance sheet report.

If you are using your credit card for both personal and business, get another credit card and use one card for personal and another for business. This will cut down on your accounting expense and keep things easier to track.

5. Loan Reconciliation

If your company has any loans, the loan balance on your balance sheet should match the loan balance on the bank or lender statement. When payments are made, they include both principal and interest which need to go into separate accounts.  Often, this is not recorded correctly and can be corrected at year end.

6. Interest Income and Expense

It’s a good idea to reconcile the balances in your interest income and expense accounts with the interest you received and paid from your financial institution reports.

7. Accounts Receivable

If you invoice clients and have unpaid invoices, then you will have a balance in Accounts Receivable. The total of this account should add up to all the unpaid customer invoices you have.

You may need to make adjustments so that the balance is accurate. For example, some invoices may need to be voided or adjusted if the amount is incorrect. You should also investigate negative balances by customer. Negative balances could be legitimate credits on account, but there could be other reasons such as improperly applied payments.

8. Uncollectible Invoices

If any of the unpaid invoices in your Accounts Receivable account are old and might not be collectible, they can be written off or sent to a collection agency.

9. Inventory

If your business stores inventory or items for sale, then the cost of these items need to be reflected on your balance sheet. The reconciliation is a counting of physical inventory and matching that to the inventory balance on your books. 

Your inventory may be a lot more involved if you manufacture goods for sale. You will have components such as raw materials and work-in-process in addition to finished goods.

The cost of each item is determined by the accounting method your business has adopted.  Once the physical count is complete, an adjusting entry can be made to adjust the book balance.

10. Inventory Write-Offs

If some of your inventory is no longer salable, it may need to be written off or sold for scrap. Your books should be adjusted for these changes at year-end or as soon as the items are determined unsalable.

11. Accounts Payable

If you owe vendors money for work performed or items acquired, then you will have a balance in Accounts Payable. The total of this account should add up to all of the unpaid bills you have.

You may need to adjust the balance for accuracy. For example, some bills may need to be voided or adjusted if the amount is incorrect. You should also investigate negative balances by vendor. Negative balances could be legitimate credits on account, but there could be other reasons such as improperly applied payments.

It’s also a good idea to review any open purchase orders. Adjustments may be needed if invoices were not properly applied or matched to purchase orders. Close any open purchase orders that are no longer needed.

12. Sales Tax Liability

If you collect sales tax when you sell your products or services and some of it is unpaid to the state or local agency, you should have an amount recorded in your sales tax liability account. It should be adjusted to the exact amount due. The amount will be determined by your payment schedule.  It could be a year’s worth, a quarter’s worth, a month’s worth, or some other amount.

13. Meals and Entertainment

One of many things your tax accountant will be asking you for is the amount you spent on meals and entertainment.  It’s important to have those items in separate accounts with no other expenses so the amounts can be determined quickly. Also, keep in mind that starting in tax year 2018, the deductibility of entertainment expenses is typically 0% while meals are still typically 50% deductible.

14. Documentation for Invoices, Bills, and Receipts

If you are ever audited, you’ll need proof of what you spent in your business. Year-end is a good time to make sure your paperwork is in order and either filed in a safe place or scanned in and saved in the cloud. 

15. Fixed Assets

Your balance sheet should reflect the long-term assets your company owns, such as vehicles, buildings, land, machinery, furniture, equipment, computers, and the like. Each of these items should be listed on your fixed assets schedule and the balance should reflect the correct value of these items.

If you sold, abandoned or otherwise disposed of any fixed assets, an entry should be made to remove the fixed asset from the books (including any accumulated depreciation) and to recognize any gain or loss on the disposition.

16. Depreciation

Certain fixed assets can be depreciated which means a portion of the cost is expensed each year. A company should have a current depreciation schedule and that should be updated each year or more often.

An adjusting entry should be made to reflect depreciation for the current year or period if it’s recorded more often.

A schedule should also be kept of differences between book and tax records so that it’s easier to complete the corporate tax return.

17. Wages Reconciliation

Expense accounts that are payroll-related should be reconciled with the sum of the payroll reported on the IRS Form 941s in all four quarters. These accounts include wages and payroll taxes paid by the employer.

18. Officers’ Salaries (or Partners’ Guaranteed Payments)

Your tax professional may need the breakout in wages between officer’s salaries and all other wages if your business is incorporated. For Partnerships, guaranteed payments to partners should be tracked separately from employee wages. Your accountant can create a separate account and make a journal entry to break it out or you can track it outside of your accounting system.

19. Bonuses

If you award bonuses at year-end, ‘tis the season to run that special payroll cycle.

20. W-2s

Hopefully, your payroll system automatically generates W-2s for your employees and the W-3 submittal, but it’s a good idea to check them to make sure they are accurate. You may also have state and local reporting requirements at year-end. 

The totals on the W-3 should reconcile to the corresponding payroll expense accounts.

21. W-4s

Year-end is a good time to see if you have copies of W-4s in hand from your employees. 

22. Vacation and PTO

If your company does not roll over vacation time for employees, there may be an adjustment to make in your payroll system to update the earned and unused hours.

This might need to be done on the employee’s anniversary date versus year-end.

23. State Unemployment Insurance Rate

At the beginning of each year, each unemployment insurance agency in the states where you have employees working will notify you of your company’s new SUI rates. These should be entered into your payroll system so that the numbers can be accrued correctly.

24. Workers Compensation Insurance Updates

Your workers compensation policy should always be kept up to date with new hires, new or changed work codes, employee terminations, and work location changes, but year-end provides a good time to double-check it. This year, your employees may very well be working from a new location, so be sure to update your policy if you haven’t already.

25. Posters

If you have workers in a state that is a stickler for labor law posters, then make sure you send up-to-date posters to each work location in your business and instruct employees to display the employment posters prominently.

26. W-9s

If you pay contractors with cash, check or electronic funds transfer, each contractor will need to furnish you with their W-9. We strongly recommend you collect this before you issue the first payment to them. But year-end is a good time to audit your records to see if you have what you need. 

You may also want to collect their insurance certificates at this time. If you don’t have them, you may be subject to paying more in workers compensation.

27. 1099s

Your company may need to generate and send 1099s to any contractor you paid over $600 for the year that was not paid through credit cards or a payment vendor like PayPal. The W-4s your contractors provide will tell you if they are taxed as corporations or not. If they are taxed as corporations, you generally will not need to issue a 1099 regardless of amount paid. There are some exceptions such as if the contractor provided legal services.

28. Other Account Balances

If you have other accounts not listed above on your balance sheet, they should be reviewed or reconciled. These accounts are less common: goodwill and other intangible assets, deposits, prepayments, escrow, and others.

It will depend on the nature of the account as to how the amount can be validated.

29. Other Accruals

There may be other accrual entries not mentioned here that apply to your situation and that need to be made by your accountant.

30. Barter Transactions

If you performed any barter agreements this year, you’ll need to make a manual journal entry to properly record the transaction.

31. Other Adjustments and General Cleanup

Other adjustments you need to make to clean up your transactions can include things like transactions that got booked without a class; entries that were made to an account when a subaccount should have been used, entries that were booked net that need to be grossed up, and entries that were booked into the wrong income or expense account or category. 

You could also have accounts, customers, vendors, or other entities that were created incorrectly and that now need to be merged or deleted after the transactions are restated.

Your data will be more meaningful and consistent when you take the time to clean it up a little.

32. Tax Documents

As you receive these at the beginning of the year, keep them in a safe place and all together for easy delivery to your tax professional. Better yet, scan them in as you get them and upload them to your client portal provided by your tax professional.

33. Cash vs. Accrual Adjustments

Many small businesses use the accrual method of accounting to keep track of unpaid invoices and bills but use the cash basis to pay taxes. In this case, reversing entries may need to be made so the books are right for tax but then are reversed on January 1 back to accrual. Some accounting systems allow you to select Cash vs. Accrual basis on reports and will automatically adjust for unpaid Accounts Receivable invoices and Accounts Payable bills.

34. Back up Your Data

Hopefully, you’re making a backup far more often than once a year. Year-end is simply a good time to take an extra backup or even test your current backups to make sure your disaster recovery plan is sound.

35. Password Change

If your accounting, payroll, bank, PayPal, and other financial accounts do not force a password change periodically, now is a good time to reset all of them.  Use a different, strong password for each account.  Hacking and especially phishing are way up in volume this year, so your chances of having something bad happen are significantly increased.

36. CPA Review

Now is a good time to allow your CPA to review your books to see if anything else should be done.  Or maybe you’ve delegated all of the above tasks to them and they’ve been with you every step of the way!

If you haven’t gotten your CPA involved yet, now is the time to do it.

37. Close or Lock the Books

Now that everything is tied with a bow, no more entries should be recorded that have a date of last year or your balances will change and no longer reconcile with all the hard work you’ve done so far. Some accounting systems allow you to close the books by preventing new entries; this is called locking or closing, so use this feature if you have it. 

38. Budget for Next Year

How close did you come this year to meeting your budget? An analysis of the year can be made at this time, along with the creation of a new budget for next year based on what you learned and your upcoming goals.

39. Tax Projections and Plan

It’s a really good idea to set up a tax projection or planning meeting with your tax professional well ahead of December 31 in case there are any moves you can make to save on taxes. This should include determining if you have deposited enough of your tax liability so that you won’t owe a large amount come tax time.

You can also get a schedule of tax payments that need to be made in the coming year for the following year’s taxes. 

Conclusion

Of course, we can explain as well as help you complete these items so that your books and taxes stay current, accurate and organized.  Reach out to us anytime so we can help you!

5 Signs You Need to Upgrade Your Accounting System

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To maximize profits in your business, all of your business functions need to run smoothly, including your accounting department. Your accounting system is at the core of your accounting function. If it is old or lacks the features you need, your business may suffer.  Here are five warning signs you can look for to determine if it’s time to upgrade or replace your current accounting system with something more cost-effective.

1. Not enough users

If your current system limits the number of users you can have in the system at any one time, this could be a major enough reason in itself to switch to a larger option. Luckily, most accounting software companies include an accountant user for free, so at least this type of user doesn’t have to count toward your total requirements.

If you’re not sure how many users you currently have a license for, we can help you check on that. It might be as easy as buying more licenses if you’re not at the maximum capacity.  But if you are at maximum, it may be time to look for a better accounting system with room for you and your business to grow.

2. Outdated

If your accounting system runs on desktop-based software that’s upgraded every year and you have not paid for or installed the upgrades, then your system is outdated.  If it’s been sunsetted, that means the software vendor no longer supports the software. You are at major risk for the software crashing, getting buggy, getting hacked, or worse, permanently breaking.

The cost of getting the system current may be better spent looking for a new alternative, or moving to a cloud-based system where updates occur automatically.

3. Lack of functionality or scale

It is commonly the case that your business has grown so much that it’s outgrown your original accounting solution. That’s good news!  It’s time to find a solution that will scale better for your business.

You might be missing important features that are costing you more time and money than if you were on a system that offered those features. Common time-wasting activities in accounting include too much time spent on data entry and/or Excel spreadsheets to make up for what the accounting system can’t do.

4. Lack of reporting and analytics

If you’re unable to receive the reports and analytics you want to run your business better from your current accounting system, it may be time to switch. With better data comes better decision-making and if lack of data is costing you money, then it’s time to find a more robust system.

5. Lack of integrations

Thousands of apps exist to expand accounting systems’ core functionality. If your current accounting system lacks integration capabilities or does not have apps that are built to integrate with it, you may be missing out on additional functionality.  This include mobile apps; it’s quite common now to do much of your accounting work from your mobile phone.

Does your current accounting system have any of these red flags?  If so, please reach out. We can help you find a best fit for your accounting needs.

Mobile Accounting? It’s Here, Now

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That’s right: The future is here! Now that it’s officially 2020, it may be time to jump on that accounting app bandwagon if you haven’t already done so. The exciting news is you can actually do a lot of your accounting tasks from your phone instead of your computer.

Here are just a few examples of accounting things you can do on your phone.

Banking

Are you still trudging to the bank to make your deposits?  If so, there is a better way! Simply download your bank’s mobile app, login, and look for the Make Deposit function. Get the check you want to deposit, write “For Electronic Deposit Only” on the back and endorse it. On your phone, enter the amount, then take a picture of the check. Presto! Hit Deposit and the money will be in your account in no time.

Receipts

Shoeboxes of receipts are a thing of the past. (Thank goodness, we say, as we wipe our forehead!) Send your receipts to your accountant simply by taking a picture of them and sending them via email or through a document entry system like Receipt Bank or AutoEntry.  You’ll need to set this up to connect with your accounting system, but once it’s set up, it’s a real time-saver.

Accounting

Wondering how much income you made last month? Download your accounting app on your phone and login to get many of the features that you have on your computer onto your phone. You’ll need to be on a cloud system like QuickBooks Online or Xero, or possibly have a hosted desktop solution in order to have this functionality.

Payroll

There’s no need to be tied to your desk on payroll day if you can submit or approve payroll from your phone.  Many payroll systems have apps you can download so you can be free of your computer.

Add-ons

There’s a mobile app for almost any add-on you might need, such as TSheets for time tracking or Square for taking payments.

Artificial Intelligence

There are even some apps where you can talk in plain English and get a plain English answer back. These apps are using artificial intelligence which is exploding in the accounting space.  You can ask questions about your cash flow or check a metric that you like to follow.

Feel free to reach out to us if you’d like to find out more or get help moving some of your accounting functions to your mobile phone.

If you find yourself on the go more often than not, having constant access to your business accounts and these features will be beneficial.

The Entrepreneur’s Guide to Starting a Business in 12 Easy Steps

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Have you been thinking about starting your own business? Being your own boss is the dream of many people, and every year, thousands of people take the courageous step of becoming an entrepreneur.

If you are thinking of starting a business or have already started a business, here is a detailed checklist of items to consider to get your new business off to a great start. 

1. Make a plan.

There are a lot of moving parts to a new business! You’ll want to get organized (or get some help becoming organized if this is not your skill) and think about how some key functions in your business will work.  Some of the topics and/or questions to consider when developing your plan include:

What will you sell? 

We’ve found there are really two types of entrepreneurs.  The first is someone who knows exactly what type of business they want to be in because they have a skill set or background in it. They have a good idea of what they want to offer the marketplace. 

The second type of entrepreneur is one who simply wants to be an entrepreneur. They may look for a franchise that already has some structure to it or a business to purchase where the owner is retiring or simply wants to sell. They don’t really care what products or services they sell, they just want a successful business to run. 

Who will you go into business with?

Do you want to start a business by yourself, or do you want to find a partner? Many people start businesses as solos and then add partners or merge with other businesses to grow or expand. Everyone is different, but it’s something you need to work out before you get started. 

You’ll also want to consider how you will build your management team.  Initially, it can be yourself along with vendors you hire like accountants and attorneys that have skill sets that you don’t. As you grow, you’ll need people to head every function in your business, such as Sales, Marketing, Finance, Operations, Human Resources, IT, and Strategy.  

Who wants to buy what you are offering?

Is there an established market for what you intend to sell? Or do you have something that is one-of-a-kind? What competition do you have, and why will your offering stand out? 

To answer this question, you’ll need to perform a market analysis that will help you see if you have competition or if you are blazing a new trail. From there, you can plan your marketing and sales activities so that potential customers wll be able to find you.

Will you be able to generate a profit?

Almost anyone can start a business, but making a profit requires planning, preparation and skill. That’s why you’ll want to crunch your numbers to make sure your business is viable. You may need the help of an accountant or financial consultant to help you complete your plan.

What is your company?

Take a crack at describing your new company. This may be the start of your mission, vision, and values statements as well. 

Once you’ve answered these basic questions about your business, you can write it up and put it all together in a business plan. The last step is to write your Executive Summary, which will go at the beginning of the document. 

You don’t have to write a business plan unless you need one to find funding, but the entrepreneurs who do have an increased chance of surviving their first few years. 

2. Make a budget.

A budget clarifies the financial aspects of your business.  How much overhead will you have? How much startup cash do you need? How much revenue will you need in order to sustain your business on an ongoing basis? 

In addition to a budget, think about how you want to measure your financial results on an ongoing basis. What metrics do you want to know about on a monthly basis?  What reports would be useful for you to make good business decisions about opportunities?  These answers may not be clear when you first start, but they will become clearer over time, and a good accountant can guide you along the way.

3. Choose your organizational structure.

Should you choose a sole proprietorship to keep down initial costs, or should you incorporate your new business? There are many choices when it comes to entity selection for your business, and they vary state by state. The most common ones include sole proprietorship, partnership, limited liability company, S corporation, C corporation, and nonprofit. These choices have both tax and legal consequences, so this decision is best made with the advice of a professional attorney, CPA, or both.

If you incorporate, you’ll need to select the state you want to do business in and file incorporation papers with the proper state agency. But before you do that, you’ll need to name your baby!

4. Name your baby.

Your new business needs a name, and this can be an exciting step! It’s important too. The business name is the first item that displays your company culture and your business identity to the world.

Once you’ve decided on a name, you should register it with your local county. In some states, this is called an Assumed Name; in others it’s referred to as a Fictitious Name or DBA. You may also want to trademark your business name; this is done at the national level by industry.

5. Get an address and phone number.

Will your business need a physical location?  In this step, you’ll need to decide what address and phone number you’ll use for your new business. If you work at home, you can always get a mailbox at a place like Postal Annex, The UPS Store, or even the post office.  This won’t always work for a street address, but it’s something you can put on your marketing materials so your business looks more permanent.

Choosing the phone is important too. A cell phone alone is not really high enough quality for a business, but many people start out this way.

6. Get an IRS number.

If you remain a sole proprietor and don’t hire any employees, you can use your social security number as the number that the IRS needs for filing your taxes. In other cases, you’ll need a different tax ID number from the IRS.

You’ll need this number for several things, such as filing income tax return, filing payroll tax returns, opening bank accounts, and getting paid in some cases.

You can now complete a form online to get an IRS number.  This page from the IRS.gov website explains more: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

7. Open a bank account.

Once you have your Fictitious Name document or your incorporation papers, you can open a bank account for your business.  This is a big step too, and a good time to start involving an accountant. 

8. Find an accountant.

You may have already have enlisted an accountant to help you with your business plan and budget. But if you haven’t, now is a good time. You’ll need to make many decisions regarding the accounting functions in your business, such as:

  • Selecting the accounting system you need and getting it set up correctly to record and track your accounting transactions.
  • Getting help with federal and state tax requirements, including collecting state and local sales tax if applicable.
  • Getting help setting up accounting processes such as invoicing customers and collecting money.
  • Getting any financial questions answered that you may have.

9. Get insurance.

Protect yourself and your new business by making sure you have all of the right insurance policies set up.  Here are a few areas for you to consider covering with insurance policies:

  • General liability
  • Building and property coverage
  • Errors and omissions
  • Workers compensation
  • Umbrella
  • Auto insurance
  • Identity theft

10. Hire an attorney.

An attorney will come in handy when you first start your business as well as act as a resource when legal issues arise in the normal course of business. Initially, there are many legal documents to set up:

  • Contracts with customers
  • Terms of agreement for your website and any other client-facing applications you may provide your customer
  • Privacy policy
  • Employment offer letters and agreements

You may also want an attorney to review any vendor or partner contracts that you will be a party to.

11. Get paid.

How will you collect money from your customers?  You should have opened your bank account already (see #7 above), so you can get paid when someone writes you a check. But that’s typically not enough options to give your clients. They may want to pay you via credit cards, PayPal, or even bitcoin.

To take credit cards, you can start with PayPal for business, but eventually, you will need a merchant account, which enables you to accept credit cards from your clients and get paid via your bank. Applying for a merchant account is similar to applying for a loan.

If you use QuickBooks, you may be able to collect money through Intuit’s payment options. You might also be able to collect money via your point of sale system or your online shopping cart software. Let us know if we can help guide you in this area. 

12. Get specialty and local licenses.

Depending on the type of business you have, you may need additional licenses and permits to operate. For example, if you plan to serve alcohol, you need a liquor license. If you’re a hairdresser, you need a cosmetology license. 

You may also need local licenses to operate in your county or city.  Check with your local city or county offices to see if a business license is needed.  Even if you are operating out of your home, you may need this kind of license. 

Starting Your Dream

Hopefully, these twelve steps will make your entrepreneurial journey a little smoother so you can begin to accomplish your lifelong dreams of owning your own business.

If we can help you along the way, especially with your accounting, tax, and business advisory responsibilities, please reach out any time.

Download the PDF version of “The Entrepreneur’s Guide to Starting a Business in 12 Easy Steps” here.

Accounting Tasks at Year-End

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You might wonder why there are so many extra tasks at year-end. While the government requires much of the work, there is clean-up work and adjustments that need to be done to make the books accurate. It’s not always cost-effective to perform all of these updates monthly, so you’re actually saving money by doing some of them at year-end.

Here are just some of the items that are performed at year-end.

Tax-related:

  • If you have payroll, employees need to be sent their W-2s, and the federal and state government need a copy of the W-2s with a W-3 transmittal.
  • For employees, you must also have an up-to-date W-4 signed by them.
  • For employers, your federal unemployment 940 return is due.
  • If you have contractors, they need to be sent their 1099s, and the IRS needs the 1099s and the 1096 transmittal.
  • For contractors, you must also have an up-to-date W-9 form from them. You may also need to request an insurance certificate, or you may get a surprise at your workers compensation audit.
  • For vendors that claim exemption from sales tax, you’ll need to be sure you have an exemption certificate in your files from them.
  • If you pay sales tax annually, your return and payment are due.
  • Your personal federal, state, and local income tax and returns are due in the spring, and they can be extended until later in the year.
  • Depending on the type of entity your business is organized as, you may have franchise, federal and state tax returns to file. This deadline comes up sooner than the individual tax return due date.

Books-related:

  • Just about every asset on your balance sheet needs to be verified in some way or other:
    • Petty cash accounts need to be reconciled and reimbursed as of year-end
    • Bank accounts need to be reconciled with the bank statements. This includes PayPal.
    • Accounts receivable balances and all other receivables need to be tied to each customer and any amounts determined to be uncollectible need to be written off.
    • A physical inventory count needs to be taken and the inventory account should be adjusted accordingly.
    • Fixed assets need to be reconciled to their fixed assets ledger and depreciation should be properly recorded.
    • Goodwill accounts need to be checked and amortization adjusted.
    • Accruals, deposits, deferred accounts and all other asset accounts need to be adjusted if necessary.
  • Liabilities and equity need to be adjusted too:
    • Accounts payable balances and all other payables need to be tied to each vendor.
    • Liabilities that haven’t been recorded need to be added to the books.
    • Loans need to tie to lender statements, and interest paid on loans needs to be properly expensed.
    • The Equity accounts need to be checked and tied out to prior year balances.
  • Corrections and adjustments need to be made:
    • Any misclassifications and corrections need to be made on the books with adjusting journal entries or other classification tools.
    • If the client is a cash-basis taxpayer, a reversing journal entry needs to be made to get the correct tax numbers.
  • A clean set of reports can now be run and used.

Documents-related:

  • This is a good time to file and store your receipts in case you are ever asked for them. For long-term storage, thermal receipts should be copied or scanned in before the ink fades.

If you’re wondering why we’re so busy this time of year, it’s all of the extra work we have to do over and above the normal monthly load. If you have questions about any of this, just ask anytime!

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