With the new year upon us, the time has come to close the books on 2021. For many companies, January is also the beginning of the new fiscal year, and with that comes making sure your book balances are accurate. The following steps will give you a leg up on ensuring your books are correct going into 2022.
Reconciling your bank accounts is one of the most important steps of closing the books and should be performed each month, all year long. Put extra scrutiny in your December reconciliation.
- Are there old checks that haven’t cleared the bank?
- If so, can you contact the recipient? Did they lose it and need it re-issued?
- If not, do you need to send it to the state as Unclaimed Property (escheatment)?
- Are there any duplicate expense entries?
- Are there deposits that haven’t cleared the bank?
- Were there any duplicate revenue entries?
- Were there collections marked as paid and ready for a deposit, but weren’t received?
- Does the reconciliation balance?
- If the ending difference is not zero, find the difference. Do not “plug” a number into a discrepancy account or clearing account – find the missing or extra transactions
- For QuickBooks users, is there a balance in Undeposited Funds?
- If a payment was received is received but not yet deposited, it will go into Undeposited Funds. Is the balance accurate? For most users, Undeposited Funds should have a zero balance at some point in mid-to-late December.
Accounts Receivable and Payable
If your company operates on a Cash basis, meaning revenue and expense are only recognized at the point of cash receipt or dispersal, respectively, your books should not have Accounts Receivable nor Accounts Payable. However, if your company operates on an Accrual basis, meaning revenues and expenses are put on the books at the time of earning or owing, respectively, you will have Accounts Receivable and Payable.
- Run an Aging Report
- Should any invoicing be written off as bad debt?
- Are there customer invoices that were paid but still outstanding?
- Are there bills you paid, but they’re still on the books?
- Have you received all bills for expenses for last year?
- Have you invoiced all customers for last year?
Making large purchases is common for companies. Large purchases of property, plant and equipment are not expensed immediately and are converted into fixed assets. Fixed assets are depreciated: their expense is spread out over a pre-determined period of time.
- Were large purchases placed in fixed assets, or were they immediately expensed?
- If there were new fixed assets put into service, was there depreciation expense booked for them?
- Are there intangible (non-physical) assets that need to be booked? Think patents, copyrights, trademarks, and intellectual property.
- Is any new property eligible for Section 179 expense? Should the company use Section 179 this year?
Odds are high that employee wages, taxes, and benefits are the largest group of expenses on your books each year. Payroll can be tricky at the end of a fiscal year since there are different payroll frequencies and can be paid in arrears. Cash basis companies face fewer issues with end-of-year payroll but can still face common payroll pitfalls.
For companies that use current pay
- Does total wage expense for the year equal total gross wages for the year?
- Are all employer taxes accounted for? FICA, UI, etc.?
- Are withheld wages for health insurance offsetting health insurance expenses?
For companies that pay in arrears and are on Accrual Basis
- Was payroll accrued for the days in December that were worked but not yet paid?
- Was any payroll accrued at the end of last December cleared correctly?
This article is not meant to be all-inclusive, as there are several topics not covered, such as prepaid expenses, deferred revenue, and other accrued expenses. However, following these steps will set you off on the right foot for the new year and your upcoming tax returns, audits, or reviews.