This is something that you or your bookkeeper should do, not your accountant … Let the accountant handle certain areas since they know what they are doing.
As the excitement of 2020 comes to a close, we get to start thinking about 2021. That is if you haven’t been hoping and praying for it for the past several months, as I have heard from several people.
However, with that, it means we have to prepare for everyone’s favorite time of year, taxes! Yes, this is intended to be slightly rhetorical due to the joys that are taxes. With tax season, we have to prepare for taxes, and this is something that you or your bookkeeper should do, not your accountant. Many accountants screw up business information to provide you with tax information. This is not a one or the other type of thing; it is effortless to keep the business analytics you have and prepare your taxes. So how do we do that? It is relatively easy to do with a few steps; sales, expenses, wages, other expenses, and adjustments, and that is what we will talk about today.
Checking sales should be the area that you spend the most time on as bad sales will affect everything else, hence why it is first. Suppose you are using an invoicing system that is integrated with QuickBooks
. In that case, you need to start there reviewing for errors, missing payments, jobs that were canceled, or incorrect payments. If you are invoicing directly out of QBO, it is easy to compare since what is in QuickBooks, or your accounting system should match what is in the books. Suppose you are using a third-party system, and it is not integrated. In that case, you need to determine how everything is put into QBO. If you are recording deposits as sales, it will be tough to match. You will have to provide a ton of source documentation if audited; if you are copying everything over, you will go about it the same way as the first option.
Once you review the source system, now it’s time to review QBO. Check your undeposited funds and make sure everything is deposited. Check you’re A/R to ensure there are no rouge credits or open invoices that should be paid. Once these are clean, then move to compare both systems as you have now cleaned both systems. Run a job or invoice report from both systems and check the total number of invoices between both systems along with total sales in both systems for the entire year. Make sure you understand how the integration works to run reports correctly and not incorrectly compare your systems. If these match or are close, you are good to go; if they are off by thousands of dollars, you need to investigate. The closer they are, the better, but sometimes, depending on reporting from the third-party system, it is hard to match precisely.
Now that your sales review is done, we get to move onto a more manageable area, reviewing your expenses. We first want to make sure that all your bank, credit card, and digital payment accounts are in QuickBooks, along with all expenses in each of those accounts. If you are keeping up with everything, this shouldn’t be that difficult. However, if you are not regularly putting in expenses, this could be time-consuming. The more detail you have, the better, and if you can provide source documents that will help make your books more audit-proof in the long run. Ultimately, you should be able to go through and reconcile all accounts to your most recent bank statement before moving on.
If you are reconciled in full, you now want to make sure that the account amounts in your accounting system match precisely what the accounts currently have. This will be easiest with credit cards and non-checking accounts, whereas checking accounts are much more likely to have uncleared transactions, and reconciling electronic accounts like Venmo and cash app is challenging. If these amounts don’t match, review the account for any unreconciled amounts and remove or void those transactions as necessary, depending on what you dig up. You may have checks that you have paid, but they haven’t been cashed; after three months, they should be no good and can be voided out of your system. If they are still relevant, then this will affect your bank balance. Keep this in mind when comparing systems together, as this could cause your balances to be different.
After accounts match, review your P&L and make sure that there are no unusual or large accounts that don’t add up to what they should. If something sticks out, investigate to make sure everything is recorded correctly, make changes as necessary. Once done, confirm mistakes weren’t made when recording loan payments or other balance sheet account payments into an expense account. Loan payments do not count as an expense; they reduce liability for your company and should be recognized as such. Ensure that these are recorded correctly so that your accountant does not need to make corrections for you and cost you extra money. Also, double-check to ensure that your account transfers and credit card payments are recorded as that and not as expenses. This is a common mistake that skews the numbers on you. Finally, check accounts like meals and entertainments, gifts, and employee incentives are reviewed to correctly classify all transactions in accounts that are not able to be entirely written off to make the best tax decisions that you can.
Still, following with me? Great you are halfway done and moving into some of the easiest tasks with minor cleanup, especially if you have been keeping up with everything throughout the year. We will just be reviewing and confirming. The first thing to check out is your payroll. These amounts should be broken out into wages, taxes, benefits, etc., on your P&L, and these amounts should match what your W-3 says because that is what the IRS is expecting to see your report in wages. Do not waiver from this, as it is a significant flag that can get you audited very quickly. If your payroll system is integrated with your accounting system, this should be very easy. If you are using a third party, ask for documentation regularly to keep up with this. The more information and documents you have, the better for protecting yourself.
For the home stretch, we have one final thing to do, and that is making adjustments to your balance sheet accounts like loans, assets, and owner equity. You have already verified all bank and credit card accounts, so now we need to go through and make sure that we remove the value of your other assets. As you buy vehicles, computers, equipment, and furniture and own them over time, they slowly lose value, which we need to recognize. Your accountant should have a depreciation schedule they can give you, or you can easily create your own. At the end of the year, you need to reduce the value of assets by that schedule and then expense that value loss to take advantage of the tax benefits you have there. Next, get loan statements from all lenders to correctly record interest and make sure loans in your accounting system match what the lender states is the balance as of today by expensing interest as necessary.
After this is done, review what you paid into the company or took out of the company as a draw (not a paycheck). Then determine if you will claim that as income or a loan from the company or if you will be making a loan to the company if you paid in a lot of money. If you claim it as income, figure out the amount and expense it out to zero out your owner’s equity for the year. If you are making it a loan, create a loan that you owe the company (an asset to the company), create documentation on payback and interest rates, etc. Once again, you want to zero out your owner’s equity. This is a conversation that you should consult a tax professional to make the best decision for yourself.
At this point, your books should be ready for a second set of eyes to review being your accountant before taxes are filed. A good accountant should double-check what you have done as you are not an expert they are, and they may still make corrections; if your uncomfortable doing the last step with adjustments, that’s fine. Let the accountant handle that since they know what they are doing. Our goal here is to get everything as clean as possible so that it is easy to file your taxes. You are one of the first done, not having an extension done and waiting months for completion. If you need help, don’t hesitate to let us know as we will be happy to help you out.