elcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: I’m a side hustler and small business owner? How should I go about closing my accounting books at year-end?
One question that is often asked by small business owners as the end of the year looms near is: “What do I need to do to close the accounting books in my business?” Year-end can be a scary time for small business owners, only made scarier by how well (or not so well) the business performed over the year, not to mention the prospect of upcoming taxes. As the majority of small businesses, especially those owned by women owners, has been impacted by the global pandemic, it’s all the more important to ensure a smooth year-end accounting.
While there are many year-end accounting tips out there, as a CPA, I like to simplify the process for small business owners. What often intimidates small business owners is not so much the complexity of the accounting process, but the overload of information and lack of a practical approach when it comes to applying accounting to everyday business. As a result, many small business owners don’t feel empowered enough to take the financial reins of their own enterprise, thus relinquishing their power to others and running the risk of mismanaging their own affairs. To this end, I’m sharing 3 tips (not a million!) to close your accounting books at year-end as a small business owner:
- Take care of any unfinished business: unrecorded income, expenses!
Year-end is the time also the time to dot you I’s and cross your t’s business-wise. In other words, it’s time to handle any and all unfinished business as related to your year-end accounting, mainly in these areas:
- Got unrecorded income or unbilled invoices? Year-end is the time to catch up on these. Look at your unbilled projects for the year, and send invoices right away. Similarly, if you have any unpaid client invoices, it’s important that you follow up with them as soon as possible.
- Got unpaid bills from vendors and contractors? Just as you want to address unpaid invoices from clients, you may also want to check on any unpaid vendor bills. In the same way, make sure any open contractor invoice is satisfied on your part as well.
- Are you behind on recording your expenses? As a busy business woman and mom, falling off the bandwagon when it comes to recording your expenses happens. However, as year-end approaches, catching up on entering all your expenses, including your mileage, into your accounting system or software, is crucial. Not only will this help your year-end financial reports be more accurate, but it will also come in handy at tax time to deduct all the tax-deductible expenses your business qualifies for.
- Verify your payroll data and make any year-end adjustments! Verify your company’s information, as well employee and contractor information, including updated W-9 or W-4. Any year-end adjustments such as bonuses and payroll periods falling during the holidays should also be handled.
- Update your data! Much can change in the course of the year, and these changes can adversely affect the way you record the transactions in your business. This includes vendor and client names, as well as any other changes you can track.
- Last but not least, plan to count your inventory at the beginning of the year so as to cover any potential software errors, and calculate your cost of goods sold.
- Reconcile your bank accounts!
Once you catch up on any unfinished business, especially in terms of properly recording your income and expenses, it’s important to verify that the totals from your accounting system/software match the bank totals on your official bank statements. Otherwise, differences between the two will create inaccuracies in your financial statements.
As a general rule, your bank accounts and accounting system need to be reconciled on a monthly basis. However, if you’ve fallen behind on this, updating your reconciliations before you close your books is essential.
- Run and Review your Financial Reports.
One of the most critical steps when closing your books at year-end is to run your financial reports. These include your Profit and Loss statement, Balance sheet, and statement of cash flows, to cite a few. Other reports to run include your Expense report, payroll summary (if applicable), sales tax summary and mileage log. These will not only give you a more accurate and comprehensive picture of the state of your business, but also help you set your budget and priorities for the following year.
While year-end is a busy time overall, it will be well worth it to do your due diligence in order to accurately close your books and start the year fresh.
The Corporate Sis.
