As the sometimes dreaded and/or awaited tax season begins, most people start realizing they have to check more than one checklist this December. If you own a business or are self-employed you need to have accurate financial statements to ensure you take advantage of all business related expenses.
First things first, before I tell you how you can check if your books are ready I have to ask a basic question: Have you kept-up with your books throughout the year? I know this sounds like a no brainer but the most common mistake I see during tax season is incomplete books!
Incomplete books means that there are transactions pending categorization in the QBO file/accounting software and the bank statements have not been reconciled to December. This can cause your Tax preparer or CPA to misreport your income and expenses in your business tax return. This is because reporting can be issued by any accounting software for the whole year even if the whole of the data is not entered into the software. So… if the answer for the question is not a resounding “Yes“, your books are not ready for tax season.
All businesses are different, and therefore have different deductions based on their industry, size and type of entity. Most importantly they may have different tax forms! A good bookkeeper will tell you that the best books are the ones you can just copy the amounts from the financial statements and plug the amounts into the tax form. To accomplish this we review the COA on a monthly basis to avoid duplications of expenses/income accounts, and that it matches the tax form the business has to file at the end of the year. To ensure your books are ready for tax time make sure to streamline your COA.
We are all human and sometimes make mistakes, but these kinds of mistakes can cost us money when it comes to tax time. An example of what I catch almost every time I review a clients books: I always seem to find a fuel expense under travel meals. I am not saying my clients are above getting food from the gas station, but unless they feed the whole crew that amount should not have been $70.00/snack. Some of these mistakes can be obvious once you are there looking, so create a Profit & Loss Detailed for the whole year and make sure everything is where it should be.
Have you Accidently Duplicated your Income? Accounts Receivables also known as A/R are the invoices you send to your customers requesting payment for goods or services. Unfortunately you may have some customers who may not pay you and in those cases you should adjust the A/R as a bad debt expense. If you are invoicing through an accounting software like Quickbooks, make sure that you receive payment and apply those payments to the outstanding invoices for your customer. What I mean is that if you invoice XYZ Inc for $100 and then you receive a check in the mail from XYZ Inc for $100 that you do not leave the invoice marked as unpaid and then record a deposit into your books for $100. The Income Statement will reflect sales total of $200 instead of the $100 if you do not manage your A/R Correctly. Please look at our Undeposited Funds Explained Article for more details.
Have you reviewed your Accounts Payables? Accounts Payables are outstanding bills you need to pay to vendors. Similarly to A/R you need to keep your A/P current, for example if you receive a bill from your supplier last month for $150 but the goods were faulty and the vendor does not require payment for the original bill. If you do not go into your accounting system to reflect this change it will leave the Accounts Payable account with a carrying balance. This will result in reflecting an inflated amount for the corresponding expense account. (AKA inflating your expenses).
If you are using a Payroll Service like ADP, GUSTO, PAYCHEX, QBO or QB Desktop then you know how much you have paid to all your W-2 Employees. However, if you have contractors and aren’t using a payroll provider to pay them on a schedule then you need to make sure their payments were accounted for before you file your taxes. This ensures that your 1099s are issued correctly at the end of the year.
Make sure that your Balance Sheet is accurate before you file taxes. This is also referred as “tying out your balance sheet”. This means ensuring that Credit Card and Bank Account balances are correct and that Loans End of Year balances are what the lender has listed. If you have a loan in your balance sheet with a balance lower than what your lender has listed there is a high chance you forgot to separate the interest from the principal in the payments. Forgetting to adjust interest from loans can affect your Net Profit as Interest are deductible expenses.
Importance of accurate and timely financial information for the success of your business.