Preparing Your Books for Year-End

December 15, 2020 | Article

By Jillian Robison, CPA

It’s that time of year again. Planning commences as the year draws to a close. Preparing your accounting records for year-end will 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 they duplicates? Do you need to resend a check? Do you need to review these items as possible unclaimed property? Where did the money for the uncleared deposit go?
  • Make sure any checks for December that have not cleared are entered if you are on a cash basis.
  • Make sure all customer invoices and accounts payable are entered if you are on an accrual basis. This ensures you’ve captured everything related to the current year.
  • Gather copies of all fixed asset purchases and loan documents, if any were financed.
  • Look at your accounts receivable aging. Will everything be collected or is there some clean up that needs to be done? Do you have any bad debt that needs 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 loans balance? Remember to include loan histories for your accountant if you don’t break out principal and interest every month.
  • Have you been forgiven for your PPP loan 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.
  • Were distributions to owner(s) or contributions from owner(s) recorded in the correct equity accounts?

Profit and Loss Checklist

  • Do a quick check through your revenue. Are there any expenses entered to a revenue account that should go to cost of goods sold or an expense account?
  • Review your revenue accounts for any income, grants, 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 that your standard revenue accounts. It is recommended that you place these items in another income account so it stands out to you and your tax accountant at year-end.
  • 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 expense items for the year as a percentage of revenue. Does it seem reasonable? Compared to another time period, does the percentage appear similar, within a range?
  • Provide your accountant with any 1099s your company has received.
  • Review your expense accounts and determine if any 1099s should be prepared.

Learn more about how to properly prepare your 1099s.

  • Prepare copies of your W-2s and W-3s and provide them to your accountant.

Learn more about how to correctly fill out your W-2s.

  • Remember that any expenses over $2,500 should 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 as one item if not over $2,500. If you have an audit of your financial statements, this threshold may be different depending on your capitalization policy.
  • Look through your miscellaneous or uncategorized accounts. Code to a proper expense 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. Your accountant will need a copy of your receipts. Also, political contributions are not deductible.
  • Look through your travel expenses. Make sure all meals are captured in a separate account.
  • Review your meals and travel accounts. Be sure to separate any entertainment expenses into a separate account.

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 as well.
  • If your accounting software has a closing process, be sure to do 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 as well.

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. That way, you can close out year-end and start 2021 right.

Year-End Planning

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