Running a business entails so much work selling, delivering, and planning that precise financial tracking throughout the year is challenging. Despite having a sound bookkeeping system in place to facilitate judicious financial records, the process is unlikely to proceed without a hitch.
Most mistakes are a consequence of incomplete information when bookkeeping data entry is performed. Lost receipts or forgotten details about specific purchases are omissions any busy entrepreneur can experience. But the start of a new calendar year is the time to locate missing information and clean up the books before presenting them to your accountant for income tax return preparation.
Repair Financial Balances
Start with the business balance sheet. This report shows all the assets and liabilities of your business. These numbers correlate with the vital tax-related amounts of business profit and owner capital. Business owners can easily verify figures on the balance sheet for accounts with financial institutions by reconciling them to their account statements. Reconciling bank accounts and credit cards are standard bookkeeping procedures.
A frequently neglected area is fixed assets, such as machinery, equipment, buildings, and leasehold improvements to rented space. Not all amounts spent on equipment or a building should be added as fixed assets on the balance sheet. Some costs are low enough to expense as small tools or repairs. Your accountant can provide the income tax standards regarding which expenditures to categorize as fixed assets. Providing your bookkeeper with these rules permits easy year-end reclassification of amounts that might have earlier been misclassified as fixed assets.
Other areas to diagnose are accrued tax liabilities and long-term loans. Such liabilities as payroll taxes and sales tax should match remittances your business is scheduled to make. They are verifiable against records in other systems, such as payroll summary reports and sales reports.
Loan payments during the year include both interest and principal repayments. A loan history statement from the lender ensures all interest is deducted as an expense, with the remainder of payments applying to a loan account on the balance sheet.
Examine More than Profit
On the business income statement, make sure the correct amounts have been posted for payroll. One expense category should report total gross wages, not merely the sum of net paychecks. A different account covers the business part of payroll taxes. This excludes taxes withheld from employee pay, which are simply part of the gross wages.
Conduct a general cleanup of accounts. Combine accounts that duplicate the same expense category using slightly different names. Don’t have too much labeled as simply “miscellaneous” expenses. Determine the correct classifications for any entries in so-called suspense accounts with names such as “Ask Later.”
You should also provide your bookkeeper with information on any business expenses paid with personal money. These are recorded as if the business had paid for them directly.
Overall, make sure to identify and confirm the validity of every number on financial statements. Some accounts may have been created during the year for expediency pending more detailed information. Explanations to the bookkeeper about unclear transactions are a responsibility of the business owner. In other words, don’t leave your tax accountant wondering about mystery figures.