Tie Up the Year for Taxes in 10 Steps Part 2: Year-end Adjustments
In Part 2 of “Tie Up the Year for Taxes in 10 Steps”, we’ll look at year-end adjustments that you’ll make to true up your accounts in preparation for the new year.
If you missed Part 1, check it out here.
Each of these steps is discussed in detail and demonstrated in my video course on Insighful Accountant’s new Training Portal.
5. Take inventory
If you sell products, this is a perfect time to adjust your inventory. QuickBooks has inventory reports you can print out to see what you’re supposed to have in stock. Take a physical count on 12/31 and compare the quantities.
If you’re using QBO’s Inventory tools for perpetual inventory, you can use the INVENTORY QTY ADJUSTMENT tool to update your quantities so that QBO matches your physical count. This is typically adjusted to an Inventory Shrinkage account.
If you’re doing periodic inventory instead, you’ll need to make a journal entry to true up your Inventory Asset account and transfer the value to COGS. Be sure to calculate your inventory value at cost, not at retail!
6. Depreciate your assets
Instead of taking large purchases as an expense all in one year, maintain them in your books as Fixed Assets. This allows you spread out the expense over several years so that your profit isn’t artificially low in one year.
Depreciation also tracks the value of equipment, machinery, furniture, and vehicles over time as Net Book Value. Every year the tax preparer makes adjustments to your QuickBooks file to depreciate your Fixed assets, and you get a tax deduction on that reduction in value.
Amortization is similar in concept, used for non-tangible values such as intellectual property and goodwill.
7. Zero out your Owner/Shareholder Equity
After your accountant has done all their work, zero out your Owner’s Contribution and Distribution accounts. Create a Journal Entry dated January 1 of the following year to transfer the 12/31 balance to Retained Earnings.
That way, your Balance Sheet for the year will only show that year’s Contributions and Distributions, instead of accumulating throughout the life of the company.
8. Close the books
After your taxes have been submitted, use the Close the Books feature. Closing the books makes sure that your file matches what you submitted to the IRS. It prevents anyone from changing historical data without knowing what they’re doing.
In QBO’s Account and Settings > Advanced, set the date to 12/31, and put in a password. Now, when you try to change an entry before the current fiscal year, it will ask for a password first. That gives you a moment to make sure it’s a good idea before you do any damage!
9. Make a backup
Even if you have a solid backup strategy, make a specific backup of your file as a year-end final copy. In QBO Advanced, you can use the Backup tool to create a copy. I like to use exportmybooks.com to create a Desktop file which can be restored to a desktop copy of QuickBooks, or uploaded into a new QBO company for reference.
At a minimum, print your P&L and Balance Sheet, and maybe even your complete General Ledger report.
10. Analyze your business
After I perform the cleanup steps in Part 1 and make these year-end adjustments, I like to run a Profit and Loss report and Balance Sheet for All Dates, with columns by Year. First I look for figures that are higher or lower than the previous year, and find out from the owner if they have a story to tell that justifies the change. This also helps identify transactions that were classified differently than in past years. Note that I generally skip over 2020 and 2021, since those years had extenuating circumstances that caused some businesses to plummet and others to soar.
I then examine these reports to look for trends over time. Is the business growing or shrinking? Is that because of changes in revenue, costs, or both?
Once you’ve perused these two reports, I encourage my clients to explore ALL the reports available and look at their business in whole new ways. You’ll both be surprised at what you’ll learn.
QBO has somewhere between 20 and 100 reports available, depending on what version you’re using. Plus, they’re all customizable!
A general business guideline is the 80/20 rule, a proportion that runs through all business endeavors. 20% of customers are responsible for 80% of profit. 20% of products or services make 80% of revenue. 20% of time generates 80% of income. 20% of staff does 80% of the work. You get the idea.
Once you can identify what type of customer is the company’s best customer, they can seek out more of them next year. Once you know which of services have the best profit margin, promote those services more. Use this analysis to make solid business decisions that will grow your clients’ companies next year.
Wrapping up
If any of these 10 steps were greek to you, that’s a sign that you have some holes in your training. 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.