For any business owner, tax
season seems to catch you off guard each time. In one moment, you were thinking
about customer relations, payroll, and growing your business, but then, all of
a sudden, you were sorting through your bank statements and receipts to figure
out what happened during the previous year. Organizing your bookkeeping before
tax season is not only about following regulations. It is about understanding,
confidence, and avoiding costly mistakes.
Proper organization of your
books will help you save time and energy when preparing your taxes and, even
more importantly, ensure there are no oversights or mistakes on your part.
Therefore, organizing your books is crucial to the tax preparation process. By
doing so in advance, you might discover some ways to improve your tax strategy
and avoid unpleasant surprises. This blog explores how to clean up messy books
before tax season.
What Does “Bookkeeping
Cleanup” Mean?
Small-business bookkeeping
cleanup refers to the practice of reviewing, correcting, and organizing your
accounting records to provide an accurate picture of your business operations
over a specific time frame. Bookkeeping cleanup differs from regular
bookkeeping, as the latter involves recording transactions as they occur.
Bookkeeping cleanup may be
necessary when you are falling behind on your books or when they contain
inaccuracies. These situations arise after a year of being extremely busy,
growing rapidly, or having irregular bookkeeping.
Some of the problems with
bookkeeping that need cleanup are:
• Unclassified revenues and expenditures
• Lack of receipt documentation
• Duplicate entries
• Combination of personal and business expenses
• Non-reconciliation of bank or credit card accounts
The importance of clean up
messy books before tax season is to ensure your books are accurate and up to
date.
Step-by-Step Cleanup
Process
Bookkeeping cleanup need
not be a daunting task. The whole process becomes much easier once broken down
into well-defined bookkeeping cleanup steps.
Collect All Financial
Documents
This is the first and most
important step in the bookkeeping cleanup process. It requires you to collect
all financial documents related to your business operations for a single
calendar year.
These include:
• Bank account and credit card statements
• Sales invoices and customer receipts
• Expense receipts, whether physical or digital
• Payroll tax documents such as W-2 and 1099 forms
• Statements from loan companies and interest income
statements
• Tax returns from prior years
Once you have collected all
the documents, ensure that you store them all in one place. You may consider
scanning all paper receipts and saving them in a digital format.
Reconcile All Accounts
Account reconciliation is
the process of checking whether your bookkeeping system agrees with the figures
on your bank and credit card statements.
Steps for account
reconciliation include:
1. Compare each bookkeeping entry against the bank statement
2. Match dates and amounts
3. Identify any missing, duplicate, or erroneous entries
It is necessary to
reconcile the accounts before tax season comes. Without doing so, income or
expenses may be under- or overstated. Moreover, the tax calculations will be
inaccurate, resulting in tax filing errors.
Categorize Transactions
After reconciliation,
examine how transactions have been categorized. Categorizing transactions
accurately helps report expenses properly based on your chart of accounts.
Consider the following
aspects:
• Unassigned transactions clearing
• Expenses review for accuracy
• Differentiation of personal and business expenses
• Tax income allocation to appropriate accounts
The improper categorization
of transactions also affects deductions. Correct categorization makes the job
of a tax preparer much easier.
Check Accounts Receivable
& Payable
Finally, check how much
money your clients owe you and how much your company owes its vendors.
Accounts Receivable:
• Generate aging reports
• Identify overdue invoices
• Check open balances
Accounts Payable:
• Check if there are unrecorded bills
• Verify vendor balances
• Look for duplicate or omitted liabilities
A good record of
receivables and payables guarantees accurate reporting of income and expenses
in the right periods.
Fix Errors and Missing
Entries
Having made most of the
necessary transactions, you need to go through your books for errors. Some of
the typical mistakes you might make when recording transactions include:
• Duplicate entries
• Omissions in recording revenue
• Classifying personal expenses as business expenses
Automated bookkeeping
software such as QuickBooks will help you spot any duplicate entries in your
accounting system. However, you should review your records to ensure all your
transactions are recorded correctly. Be sure to check for anomalies that may be
due to omissions.
Where you have classified
personal expenses as business, be sure to correct them. Separating finances is
an important practice to ensure accurate records and easier tax preparation.
Prepare Financial
Statements Required for Tax Preparation
The last thing to do before
filing your taxes is to prepare your financial statements. They include:
• Profit and loss statement
• Balance sheet
• Cash flow statement
They provide the summary of
your business operations during the year and form part of your tax returns.
Tips to Stay Organized
Year-Round
It’s good to do annual
cleaning, but good habits will help you organize your financial documents and simplify
bookkeeping. Keeping up with bookkeeping throughout the year will save you from
having to clean it up later. Think of the following best practices as a
year-end bookkeeping checklist.
Best practices for business
bookkeeping:
• Account reconciliation monthly
• Receipt uploading when making expenses
• Quarterly review of financial reports
• Bookkeeping reminder setting
• Regular use of bookkeeping software
When to Get Professional
Help
Certain bookkeeping
clean-ups may be completed in-house through the procedures described above. In
some cases, however, professional assistance may prove beneficial.
Indicators that you may
need help with your bookkeeping include:
• Out-of-date books by a few months or even years
• Diverse accounts that have not been reconciled
• Expense accounts that are confusing or not categorized
correctly
• Insufficient time to complete the bookkeeping clean-up
process before the tax deadline
The combination of
bookkeeping cleanup services and small-business tax preparation will minimize
your stress and increase your accuracy.
Final Thoughts
Getting your books in
order before the beginning of the tax season is one of the most efficient
things you can do in order to ensure the safety of your company and minimize
stress levels. Well-organized books will help you file taxes more easily,
provide you with valuable information about your finances, and decrease the
number of unpleasant surprises. All you need to do is follow the steps we
described in this blog post to get your books in order. For professional help,
contact us at AccureCFO
