Where did the year go and where is it heading? For your business? As much as I would like to wax poetic about the general universe, our current environment and touch on new year’s resolutions, this post is going to be solely based on how you, as a business owner, can prepare your year end financials to help you make better business decisions.
Before we jump into the three core financial statements that you will need to prepare for your tax preparer, we need to make sure your books are accurate and up-to-date for tax time. Now, let’s be honest, have you kept up with your financial record keeping? When WAS the last time you did bank reconciliations?
DIY bookkeeping? Hire a QuickBooks certified bookkeeper to help you get your bookkeeping in order. Request a consultation here.
Even if you are a little, ahem, or a lot, [double ahem], here is a year-end bookkeeping checklist to get you moving in the right direction with your bookkeeping. Hey, maybe this will be the year, tax-year that is, your CPA doesn’t send you 10 pages of adjusting journal entries. Hint, if you do get adjusting journal entries from your CPA, give them to your bookkeeper so you can go back to focusing on your business.
Year-End Bookkeeping Checklist for Businesses Using QuickBooks Online
☐ Confirm the first month of your fiscal year is correct.
In QuickBooks Online, navigate to the Advanced tab under Account and Settings.
☐ Run an Accounts Receivable aging report for the current year.
Do have any clients with outstanding invoices? If so, generate and send a statement to each client.
☐ Clear the Undeposited Funds Account.
Be sure to record bank deposits if you have payments in your undeposited funds account.
In your QuickBooks account, Click New, select Bank deposit. If you have payments in your undeposited funds account, they will appear here. Check to add them to the bank deposit and don’t forget to actually deposit the funds in your bank account either in person or via your bank’s mobile app.
☐ Run an Accounts Payable (A/P) Aging report and check Vendor Account Balances.
Do you have any outstanding bills or unpaid invoices that need to be paid prior to the last day of the fiscal year.
☐ Reconcile All Accounts
Gather your statements from any bank accounts and credit card statements; as well as any other supporting documents such as business receipts and purchase orders. If you can’t find physical copies, login and download them. You will want to review these to ensure all transactions are entered correctly and match your statement’s beginning and ending balances.
If the balances are off with a reconciliation, save your progress and look for transposed transactions (if they were manually entered) and look for duplicate transactions. Remember, QBO should match your bank statements, and not the other way around. In this instance, the QBO to bank statement relationship is one way.
Need help reconciling your bank accounts? Request a consultation today and head into the new year organized and prepared.
☐ Run Year-End Financial Reports
Once you have reconciled your bank statements and there are no errors, run these three reports:
Profit & Loss Comparison Report
The P&L statement (aka income statement), is going to be a snapshot of how your business did for the current year compared to last year. If your business is brand new this year, you won’t have numbers to compare against.
What to look for? Look for any significant percentage change. For example, is your office supplies expense up 100% while revenue and cost of goods is flat? If so, double check that all the expenses classified as office supplies are correct.
Balance Sheet
The balance sheet is akin to an annual health checkup for your business. It provides a clear picture of your company's financial status, indicating whether your business is thriving or requires attention. Essentially, the balance sheet answers a critical question: If you were to sell your business today, could you cover all your liabilities and still satisfy shareholder equity?
What to look for? Calculate your Quick Ratio, Working Capital Ratio and Debt to Equity ratios.
Quick Ratio: Assesses your ability to meet short-term obligations without selling inventory.
QR = Current Assets - Inventory / Current Liabilities
Current Assets: Include cash, accounts receivable, marketable securities, and inventory.
Current Liabilities: Include short-term debt, accounts payable, and other liabilities due within one year.
Results: A ratio of 1 or higher is typically considered good, as it indicates that the company can pay off its current liabilities without needing to sell inventory. Whereas, a ratio less than 1 suggests that the company might not meet its short-term obligations without selling inventory, indicating potential liquidity issues.
Current Ratio aka Working Capital Ratio: Evaluates the efficiency of your asset utilization and short-term financial health.
WCR = Current Assets / Current Liabilities
Current Assets: Include cash, accounts receivable, marketable securities, and inventory.
Current Liabilities: Include short-term debt, accounts payable, and other liabilities due within one year.
Results: Ratios between 1.5 and 3 are often seen as healthy. It suggests that the company has more than enough current assets to cover its current liabilities. A ratio below 1 indicates that the company's liabilities exceed its assets, which can be a sign of potential liquidity problems.
Debt to Equity Ratio: Measures your company’s financial leverage by comparing total liabilities to shareholder equity.
D2E = Total Liabilities / Shareholder’s Equity
Total Liabilities: This includes all of the company's debts, both short-term and long-term.
Shareholder's Equity: Also known as owners' equity, this is the residual interest in the assets of the enterprise after deducting liabilities.
Results: A lower ratio (e.g., 0.3 to 0.6) is generally preferable, as it indicates a company is using less leverage and has a stronger equity base. A high ratio (e.g., over 2) implies the company is heavily reliant on debt financing, which can be risky if the company's cash flow is not stable enough to meet its debt obligations.
Cash Flow Statement
This report shows you how money flows in or out of your business at a given point in time. By reviewing how money moves from your operating bank account, you’ll be able to see what your business’ spending habits are and plan for any future needs.
What to look for? Keep an eye for any irregular patterns in cash flow. Is there a big influx due to other financing or investment activities? Is there a negative balance from too much spending?
☐ Profits? Re-invest or distribute as needed.
You’ll want to work closely with your accountant to help you decide what to do with recognized profit. And if you are showing a profit, but not sure where the cash went? Run a cash flow statement to see how your cash account balances have adjusted month over month.
☐ Prepare your tax returns with your CPA or Accountant.
Your CPA will likely ask you to export these three statements to send them:
Year-end Profit & Loss
Year-end Balance Sheet
General Ledger
Be sure to export those and note any additional questions you may have.
☐ Reclassify and make any necessary adjustments (AJEs).
Once your CPA or Tax Preparer has prepared your taxes for your review and you agree, sign and file, your CPA may have a set of AJEs, adjusting journal entries, for you to enter in QuickBooks prior to closing your books for the year.
☐ Close Your Books.
After you have filed taxes and entered any adjusting journal entries, be sure to go into QuickBooks and close your books for the year. You can then choose whether to require a password for any changes after the books are closed.
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