Tie Up the Year for Taxes in 10 Steps Part 1: Cleaning Up Bad Data
It’s that time of year when business owners get anxious and accountants get busy. We’re all preparing for March’s tax season!
If you’ve been keeping good records throughout the year, tying up your books for the year should just take a few hours. Then you can pass the file off to your CPA with confidence.
If you haven’t been keeping good records….well, we’ll talk about that in a little bit.
Here are ten steps you can take to finish off your QuickBooks bookkeeping and be prepared for the new year. In this article, Part 1, I’ll point out 5 places to locate bad data in your clients’ books, and what you can do to fix what you find.
In Part 2, I’ll outline 5 year-end adjustments to make to prepare for a fresh start in January.
Each of the steps is discussed in detail and demonstrated in my video course on Insighful Accountant’s new Training Portal.
1. Confirm your A/R and A/P
It’s important to start with making sure your A/R and A/P are current. Run an Accounts Receivable Summary report and an Accounts Payable Summary report.
Are all the open Customer invoices actually open? Did you make deposits that should have been Invoice Payments? What are you doing to collect on the overdue invoices? Do you need to write off any bad debt? If you’re accrual-based, you will credit old uncollectible invoices to Bad Debt in the current period. If you’re cash-based, you can Void them or use the Write-Off Invoices tool in the Accountant Tools briefcase.
For open Vendor Bills, did you pay some of them using a check instead of applying a Bill Payment? To fix this, open each check and Add the corresponding bill.
Important! If you see any $0 rows, it means you’ve made a payment, but you didn’t apply it to the original transaction. Open the payment and apply it properly.
2. Make sure there is nothing old in Undeposited Funds
Every single time you take a customer payment, deposit it to Undeposited Funds. When you see a deposit in the Banking Feed, make sure it MATCHES these already-existing transactions, removing them from +New > Bank Deposit.
If you have old transactions in +New > Bank Deposit, that means you probably ADDED deposits in the Banking Feed, instead of MATCHING them. Your Income on your P&L is too high and you’ll pay too much in taxes!
To fix this, look in your Checking account register for Deposits that display your Income account (“Sales of Product Income,” “Sales,” “Construction Income”, etc.). Open them, and click on the actual Payments and Sales Receipts on the list above so that the dollar amount is the same as the amount on the bottom. Trashcan the manual entry at the bottom. When you save the Deposit, your income will be fixed.
3. Reconcile all your bank accounts
Reconciling should happen at the end of every single month, but you can’t close out the year without completing the December reconciliation. Reconcile all your accounts: checking, savings, petty cash, credit cards, PayPal/Square, and loans.
What’s important is to not just match the transactions that ARE on the statement…you also need to manage the transactions in your register that are NOT on the statement. Why are they there?
- Are they transactions that didn’t clear until the following month, or checks the vendor didn’t cash yet? Those are fine.
- Or, are they duplicate transactions? Those need to be deleted!
- If you have any transactions that still aren’t on the statement, you need to research them and find out why they’re there. Whatever they were, they didn’t hit the bank!
By the time you’re done, all your transactions will be present and accounted for.
Don’t forget to reconcile ALL of your liability accounts, including your Sales Tax and Payroll liabilities. This is the only way to catch it if you added transactions from the banking feed as duplicates, or categorized them to these accounts instead of expenses.
My Reconciliations course not only includes a practical demonstration of a reconciliation, it also demonstrates tips and tricks to make it easier, and how to identify why stragglers are in the register.
4. Make sure your transactions are categorized properly
Just because your balance matches the bank, it doesn’t mean all the transactions were put in the right places.
Note that bookkeepers and accountants have a Reclassify tool that business owners don’t have, allowing us to batch edit many transactions at once instead of manually changing one at a time.
If you have to edit manually, run a Profit and Loss report for Last Year. Click on each of the Income, Expense, and Cost of Goods amounts. Scan the list. Is each transaction supposed to be where it is? If not, click on the entry to open it, and change the category to the correct one.
Here are some traps to look out for:
- Personal money moved in and out of the business: Classify these using Equity accounts for Owner Distribution and Owner Contribution (LLCs should use “Member” or “Partner” instead of “Owner.” Corporations should use “Shareholder”).
- Meals and Entertainment: Your morning Starbucks and your lunch do NOT count as Meals! The first thing to know is that there is no Entertainment deduction anymore. The next is that Meals is reserved for business meetings, not to keep you from getting hypoglycemic. If you are talking business with a colleague or client, that’s fine - be sure to make notes on your receipt about who you were with and what you discussed. If you’re using QBO, you can take a picture of your receipt and create the transaction on the spot to save data entry time back in the office!
- Fuel & Auto Expenses: Your daily commute to work is not a business expense unless you’re driving a company vehicle to job sites. Instead, fill up your gas tank and pay for your repairs with personal money, and keep a daily log of how many miles you drive every day for what purpose—QBO has a built-in tool that Company Admin users can implement, and MileIQ is a fantastic app! Then talk to your CPA about taking a standard mileage deduction, designed to reimburse you for your gas and car maintenance.
Keep an eye out for my next article,
Tie Up the Year for Taxes in 10 Steps Part 2: Year-end Adjustments
Head over to Insightful Accountant’s new training portal at https://ia.matrixlms.com/ to explore courses that will take your practice to the next level.