If you are a business owner, the year-end closing is a critical part of your annual accounting process. If you are handling your own record-keeping, here are some things that you can do to help ensure your books are accurate.
1. Perform a bank reconciliation of all your bank accounts.
A bank reconciliation is a procedure that matches receipts, disbursements and other transactions you have recorded in your general ledger to what has cleared the bank. This procedure should be performed monthly to identify errors in your accounting records as well as possible errors the bank has made. As the business owner, ask to receive the bank statement unopened each month and review the statement and check images for unusual transactions, payees, and signatures. This is a good internal control to prevent unauthorized disbursements.
2. Reconcile loan balances to year-end loan statements.
Have all loans been recorded in your books? For example, your company acquired a new vehicle for an installment loan. If the loan has inadvertently not been recorded, this may cause you to miss an important depreciation deduction for the vehicle as a result of the asset being unrecorded.
3. Bring up to date your inventory balance.
If you are in a business that maintains an inventory (raw materials, work in process, finished products, and/or goods held for re-sale), be sure to take a physical inventory at year-end. Value the inventory at cost (not retail value) and bring your general ledger up to date to reflect the amount of inventory you actually have on-hand. Getting this right is critical for retail or wholesale businesses to properly reflect their net income. If ending inventory is overstated, net income will be overstated. If ending inventory is understated, net income will be understated.
4. Review your outstanding accounts receivable and accounts payable.
If you report on the accrual basis, revenue is recognized when it is earned and expenses are recognized when they are incurred. The end of the year is a good time to review your accounts receivable for possible bad debts – bad debts can generally be claimed for tax purposes in the year they are considered worthless. On the accounts payable side, have all unpaid expenses been captured in your accounting system?
5. Review your fixed asset detail.
Did you sell any assets? Are there assets that were disposed of but are still on the books? Bringing your fixed asset accounts up to date for disposals can save money by reducing assets subject to local business personal property taxes.
6. Reconcile your company credit cards to your general ledger.
This is the same procedure as #1 above except it has to do with credit cards. This will ensure you haven’t missed any deductions charged to your business credit card. This procedure should also be done monthly and can detect improper use of a company credit card for personal purposes.
While not all-inclusive, the above steps will help you create more accurate records so you as a business owner have a better idea of the correct profit (or loss) your business is generating.
At Jones CPA Group, we’re more than a public accounting firm. Since 1979, we’ve built a reputation as accessible professionals who help our clients improve their profit margins. Stephen M. Jones, CPA, ABV, AEP can be reached via email at steve@jonescpagroup.com.
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