Introduction
As the end of the year approaches, it is essential that small businesses take on the responsibility of getting and maintaining an accurate record of their financial information in order prepare for taxes. In addition to fulfilling the business’s basic regulatory requirements, small business bookkeepingmay allow small businesses to gain a clear picture of how they are doing financially and may enable them to build a strong financial position to grow from moving forward into the next year.
Because keeping business records organised helps to provide business owners with an estimate of what their approximate tax liability will be as well as to maximise any deductions to which they may be entitled, they greatly reduce the risks of having tax return errors cause them to owe taxes post-deadline (which likely would result in substantial penalties). With proper year-end bookkeeping, small businesses can take advantage of strategic benefits rather than stressing over filing a tax return with the IRS (and all other stakeholders) and can take the time needed to review all documents before sending them off to the IRS. Proper bookkeeping allows for (among other things) the expeditious detection of discrepancies and/or errors in the current tax documentation and provides business owners with plenty of time to resolve any potential issues before they grow into much larger issues. Finally, a business owner/s can use a structured approach to bookkeeping that not only streamline meetings with their CPA/accountant, but will also greatly increase the likelihood of being able to complete their taxes in a timely fashion and avoid a lot of stress during the next tax filing season.
1. Review and Reconcile Financial Statements
When you keep consistent records as a business owner, it will help you estimate your tax obligations accurately, allow for the fullest use of available deductions and eliminate the potential for late filing penalties (or the IRS) due to either misreporting your income or missing a deadline. Your ongoing bookkeeping provides an accurate assessment of your business’s cash flow and overall financial status and gives you ample opportunity to make sound decisions about your business throughout the year.
As you go through the bookkeeping process, you should take notice of and routinely record the types of expenses that are common for a small business, so you do not miss anything. Examples of these expenses include daily operating expenses such as: office supplies like paper, ink, and postage; accounting, invoicing, or project management software subscriptions; payroll wages & payroll taxes; utility bills; or rent; along with any insurance premiums. Additionally, many businesses choose to track advertising and marketing expenses; professional services such as legal and accounting fees; travel expenses; meals consumed on-business trips; expenses incurred to purchase equipment; and ongoing repairs and/or maintenance. Recording your small business’s bookkeeping expenses as they occur will help ensure the correct categorization and full inclusion of these expenses in the financial record.
Tracking your small business bookkeeping expense list throughout the year will make preparing your tax return easier and help alleviate stress when it comes time to file your tax return. Keeping accurate and current records will allow you to anticipate income, expenses, and taxes owed while also supporting deductions should any questions arise about them later on. Using this discipline of bookkeeping will help ensure your tax compliance, as well as contribute to a more predictable and financially sound small business.
2. Categorize and Verify Expenses
Accurate categorization and verification of expenses are critical to capturing all potential tax-deduction opportunities available to you and maintaining compliance. Items that have been inaccurately categorized (i.e., travel and meals) may affect the amount of tax-deductible expenses available to you and/or may result in increased scrutiny from the Internal Revenue Service (IRS). As you continue using your accounting software to categorize your expenses, ensure the categories correspond with those defined by the IRS (i.e., advertising, utility expenses, office supplies). Be diligent about entering your expenses as soon as possible, so that your year-end adjustments are negligible, and so that your financial reports reflect accurately the transactions that occurred during the year. In addition to providing valuable insights into how much money you have spent, an organized expense log will also allow you to identify areas where you may be able to reduce expenses. To further optimize this process, refer to comprehensive resources, such as the IRS guide on deducting business expenses.
3. Assess Accounts Receivable and Payable
At the close of each calendar year, it is important to assess and collect on any invoices that remain unpaid and to confirm your existing liabilities (payables). This means that you should review your Accounts Receivable (A/R) to identify any delinquent accounts as well as designate customers that you will need to contact again regarding an overdue payment. You may also need to consider writing off any accounts that you believe are uncollectible (bad debts). Tracking A/R accurately is critical for eliminating the chance of overstating your revenue (in taxable income). For tax purposes, you only want to report the income, which you believe you will actually collect. Additionally, you should also update your Accounts Payable (A/P) to identify the total amount of your liabilities and to schedule any payments due prior to closing your books at year end. Having a clear picture of both your A/Rs and A/Ps will assist you in managing your cash flow while providing a complete view of your financial statements for tax purposes and internal planning at the year end.
4. Conduct an Inventory Check
For any business that manufactures or sells physical products, completion of a complete physical inventory is an important step in the process of conducting a yearly physical inventory count due to its use in determining COGS and directly affecting income tax. In addition to determining COGS, have you investigated any differences between physical counts and your business’ inventory records? You can find the reason(s) for the difference(s); it could be due to employee theft, vendor error(s), or incorrect entry into an accounting system. Having accurate inventory data allows your business’ management to make better decisions regarding when and how much inventory to purchase, which will allow for the correct amount of inventory to be maintained to avoid stockouts and overstocking in the coming year.
5. Evaluate Fixed Assets and Depreciation
You should ensure that your fixed asset ledger includes all buying/selling activities. You will also need to validate your fixed assets when filing your annual depreciation deduction – this is often a large deduction for many small business owners. In addition, you will need to calculate the depreciation of each fixed asset in accordance to IRS regulations, and to keep appropriate supporting documentation for each asset. Keeping this information current will provide you the best chance of capturing all allowable deductions, as well as ensuring compliance during an audit.
6. Prepare for Tax Obligations
Begin gathering everything you will need to complete your taxes — such as W-2s, 1099s, payroll records and receipts that support deductible expenses. Be sure to keep copies of any estimated tax payments you made during the year. Your CPA will have a much easier time working with your records when they are organized correctly, which gives you the opportunity to take full advantage of all available credits while minimizing errors in your tax filing. Meeting with a tax specialist at this point can also aid you in identifying ways to reduce your tax debt or find any missed credit opportunities for next year.
7. Plan for the Upcoming Year
When you finish your accounting for the year, use what you’ve learned from year-end accounting to create your strategic plan and forecast for the upcoming year. Take a look at your revenue and expense trends, and use that information to create an accurate budget. By preparing and planning now, you will position your business for future growth as well as give next year’s accounting a stronger base to build from.
Conclusion
In addition to preparing your business for tax filing, completing year-end accounting also gives you a chance to improve how you run your business and develop a plan for next year. Creating these daily routines will give you confidence that your business is financially secure and compliant with all local, state, and federal regulations, no matter what obstacles may arise in the future.
