How to prepare your books for year-end

As the end of 2021 quickly approaches, it’s time to start getting ready to close your books. Proper preparation means you can step into the new year with confidence and save yourself a headache before fast approaching deadlines. When you work with us, your books are maintained on a monthly basis. WA completes a monthly close for every client; however, there are some tasks that are done specifically at year end. With our years  of experience, we’ve created a step by step process that helps us prepare our clients’ books for year end.

But not every business owner has been working with an accountant this year. If you’re a small business owner planning to tackle your accounts on your own, you can still have a low stress, low cost, and successful year end as long as you follow some key steps to properly close your books. 

It’s a process. Take it one step at a time.

Our Director of Bookkeeping, Sarah Duke, created a step-by-step checklist we follow for our clients here at WA, starting in October and carrying on into January. This checklist is our tried and true way to flawlessly close out books and prepare client accounts for the new year and tax preparation.

Knowing that our clients’ books are current, we start working on those special items that are not part of the monthly close. If your books aren’t current, make sure every transaction is coded from bank and credit card statements. Reconcile all cash and credit card accounts to a bank statement. THEN, you’re ready to get to the year-end stuff. (More on DIYing your books below.)

Here are a few of the steps we take care of in the fall:

  • October: Tie up loose ends. We take steps to address open items with the client before the hectic holiday season, like reviewing “ask my client” transactions that need reclassification. We also go over transactions that affect equity like distributions, estimated tax payments and personal expenses made from the business accounts. This is also a great time to get a copy of our client’s tax return from the previous year to post tax specific entries that may not already be on the books.
  • November: 1099 Vendor Review. It’s best practice to collect W9s from vendors before paying them, but we don’t manage every client’s bill pay process. Before the hustle of January starts, we check our clients’ vendor files to  make sure the W9 paperwork is in place for contractors, service providers, attorneys and landlords.
  • December: Special payroll and bonuses payouts. We really watch the calendar here and make sure to leave enough time to confirm information with the client to meet payroll processing deadlines. Holiday bonuses and special payroll runs for S-Corp owners are first on the list of items to discuss.
  • January: Payroll Tax Filings, W-2s and 1099s. January is a deadline intensive month. Annual payroll tax filings are due (W2s, W3s, 940s), fourth quarter payroll tax filings are due (941s) and 1099s are due for specific vendors. We complete the filings by the deadline (the 31st or first business day afterwards) and make sure our clients and their employees have copies for their files. Confidential information is included in the filings, so password protection is a must when distributing.

What if I don’t have an accounting system in place?

As a small business owner, you might still be handling bookkeeping tasks on your own, or are not in a position to hire an outsourced accountant yet. If you’re planning to DIY closing your books this year, follow these steps to ensure everything is done properly and efficiently. 

Commit to using a general ledger program

A general ledger is a tool found in most accounting software that stores and organizes all your financial data. It’s incredibly helpful when it comes to tax preparation, bank reconciliations, and generating reports based on your accounts that can help you make decisions for your business. 

Committing to using a general ledger will help you keep clean, orderly books that make your tax accountant’s job much easier. 

There are several free general ledger packages out there, like Wave, and inexpensive ones, like Freshbooks. At WA, we use QuickBooks Online (QBO). It’s an accounting system that you can start with as a brand new business and it has the capability to scale with you as you grow. We have multi-million dollar clients who are still using the software and it keeps up with their demands very well. They have different subscription levels that address the needs of small to medium-sized businesses.

Make sure you have electronic access to your bank and credit card accounts 

You don’t need to spend hours keying in each piece of information from your bank or credit card accounts into your general ledger system. If you have electronic access, you can download all your data in CSV format. You’ll then need to format this information in your CSV spreadsheets so it can be uploaded directly into your general ledger system. 

The proper formatting for a CSV document may vary on which general ledger system you’re using. You can see the QBO formatting here. Once your data is uploaded into your general ledger, you’ll then go through and code them into the right account. 

Congratulations! You’ve now built a set of books. The next step is reconciliation and making sure all your transactions are accounted for. 

Check for expenses and income that haven’t been run through the business bank account 

At WA, we have clients come to us looking for a “cleanup job” of their books, typically in preparation for tax season. As one of our last steps, we ask business owners: 

  1. Did you pay for anything out of your personal funds that you need to be reimbursed for and tracked as a business expense?
  2. Did you get paid for a service in a way that wasn’t run through your business bank accounts? This could be cash or, commonly, through Venmo? 

It’s important that every business transaction is recorded in your accounts, even if that transaction wasn’t initially run through a business bank account or credit card. This goes for expenses and income. It may seem harmless to overlook a Venmo transaction you took for a service provided by your business, but the IRS would consider this failure to report income and that can lead to penalties and interest.

A few other items we recommend that you record in your books before year end:

  • Unpaid invoices: this is most helpful to you as a business owner, so you know exactly who owes you exactly what as you close out your books
  • Unpaid bills: Again, as a business owner, this helps you understand your full financial picture and prepare for any payments that need to be made in the new year 
  • Unpaid loans and loan interest payments: specifically in 2021 and 2020, you may have taken a PPP loan (or maybe two). Did you receive forgiveness for these loans? Whether the answer is yes or no, make sure these loans are recorded properly on your books.

Create an “Ask My Accountant” account in your chart of accounts

Inevitably, as you record all your transactions and sort them into the correct accounts in your general ledger, you’re going to come across a transaction that you’re not sure what to do with. To prepare for this, we recommend creating a temporary suspense account. In the QuickBooks world, we call this an Ask My Accountant (“AMA”) account. 

A temporary suspense or AMA account is an account where you will record any ambiguous or confusing transaction that’s proper categorization still needs to be determined. Putting them all into an AMA account keeps them organized and ensures you don’t close out your books until this account is empty and every transaction has been properly classified.

Get your books checked by a professional to save time and money

At WA, we have a service where we’ll perform a diagnostic review of your accounting file and “scrub” the general ledger. A few of our clients maintain their own books and engage with us once a year before tax season for a high level review of general ledger. We make sure all their transactions are coded properly and go through their AMA account so their books are correct and organized before they’re sent to the client’s tax accountant. 

If you’re a small business owner DIYing your books this year, we recommend hiring a specialist to do a general ledger scrub before you hand things over to your tax accountant. This will give you peace of mind and could end up saving you money in the long run; if your tax accountant gets a set of books that are wrong or unclear, they’ll charge extra to get their questions sorted before they even get to the tax side of things. 
A $500 diagnostic review by an accounting specialist like Walker Agency means you’re handing over the tidiest books possible to your tax accountant and they can do their job quickly, easily, and with no extra charges for bookkeeping. To go into the year-end with confidence, get in touch with us today and select “Accounting file evaluation or cleanup” as the service you’re interested in.