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Small Business Accounting: How to Close Your Books at the End of the Year?
2020 has been a troublesome year for almost all types of businesses; moreover, the year-end accounting processes add to the stress business owners already have due to operational and financial disruption due to the COVID-19 outbreak and its impacts.
Many companies close accounting books at the end of the year, where a sound bookkeeping system makes the entire process a little easier. However, regardless of the business type, the closing process generally includes reviewing your company’s transactions (of the whole year), ensuring the financial information is appropriately categorized.
New businesses that are performing accounting closing for the first time might face several challenges at this time due to lack of experience. Still, adhering to the closing process’s vital basics can help them work things out smoothly. Here are some tips from experts on closing accounting books at the end of the year.
9 Best Tips to Close your Accounting Books at the Year-End
1. Follow Prescribed Guidelines
Hemalatha Parupudi of Interview Buddy, says, Small business accounting is carried out by maintaining complete records of income and expenses while accurately extracting financial information from transactions. It is necessary because this information helps business owners track and utilize their finances effectively.
There are certain prescribed guidelines (which every business needs to follow) to close the accounts at the end of the year—such as from posting Journal entries to generating final statements. Closing your books says that your reports are finalized and in compliance with accounting norms. These reports represent you’re the financial position of your business over a particular accounting period.
2. Close Your Books Monthly
Andrew Roderick, CEO of Credit Repair Companies, says, “As a small business owner closing your books at the end of the year can be a daunting task. We adopted a process to close our books monthly; this makes the annual job so much easier; it has helped us look at financial areas to improve and how to manage our finances better.
Small business owners can spend a small amount of time each month, ensuring that they have a clear view of their financial conditions, allowing them to prepare better for the future on economic grounds.
Monthly closing has allowed us to identify and correct some mistakes that could have been costly if they had gone off for an extended period, and if it ever arrives, we are ready for an audit.
Closing our books monthly to prepare for our year-end has also supported our business during the pandemic. We were fortunate to go into the pandemic knowing the company’s financial health and have been able to keep it healthy.
3. Consider Using Accounting Software
John Ross, owner of a small business, Test Prep Insight, says “With accounting software systems like QuickBooks and Sage, it is easier than ever to close out your books at the end of the year. In fact, all you really have to do is make time to make sure all of your transactions for the year are properly dated and categorized. Set aside time and match uncategorized revenue, expense, and other transactions in your accounting system to their proper category. The software will do the rest.
Once you’ve fully updated your transactions and moved them to the right category, it’s honestly just as simple as hitting a button to run your financial statement reports. It’s not like the old days when you had to transfer journal entries to a general ledger and make adjusting entries. Almost every business uses accounting software of some sort today, and the program does the hard work for you. You just need to tell it where each transaction goes. From there, “closing your books out” is just a matter of running reports.
But one part of closing your books out for the year that you absolutely should not forget is to send 1099s to all of your vendors. The IRS requires that you send a Form 1099-MISC to all the vendors to who you’ve paid more than $600. This form must be sent no later than January 31. This is a crucial step that you shouldn’t forget, or you risk tax penalties.
4. Follow These Tips
Dawn Hatch, the founding partner of Matax Inc., informs that;
- Record each transaction and ensure you have receipts to validate the same
- Reconcile receipts with bank statements
- Review the Income Statement and Balance Sheet
- Review the list of Accounts receivable in order to know how much is collectible and how much you need to write off
- Review the list of Accounts Payable and make all pending/late/due payments
- As you pay your employees, you must review the W2s form and make sure you include all paid commissions, bonuses, and benefits provided
- Count your inventory items and if needed, make adjustments in your accounting system
- Make all essential accruals and depreciation entries
- Keep your accounting file secure so that no one can make changes
- Utilize the reports to make your next financial year better
5. Use Accounting Software and Hire a Reliable Accountant
Christine Wang, the founder of The Ski Girl, says, “I use Fresh Books accounting software to keep my books in order. I’ve found this to be the most useful platform, and it’s very easy and intuitive to use. I track all of my expenses and income as frequently as possible and make sure to update my books at least once a week. This makes closing everything at the end of the year a lot smoother than in years past when I delayed updating everything until the end of the year.
My process for closing the books at the end of the year goes like this – update all of my income and expenses within FreshBooks, produce the necessary reports to send to my accountant (P&L, Payroll, Fixed Assets & Depreciation) alongside anything else they need to complete the process.
Really, I would always suggest having a great accountant to help with the process; it just makes everything that much easier.
6. Account for Depreciation Properly
Matt Rostosky, the owner of Cash Offer Kentucky, expresses that, “Remember to always account for depreciation for all of your fixed assets. This is a common process that real estate agents running their startups often tend to forget. The IRS is able to determine how much of an asset’s life has depreciated over the year, and you can write it off the amount that is used as a deduction in your tax.
7. Manage & Reconcile Transactions throughout the Year
Ben Taylor, a business owner and founder of Home Working Club, says, “Closing books at the end of the year is something you can get better at with every year that passes. Ultimately how easy it is to close your books depends a lot on how well you’re managing and reconciling your transactions throughout the year. You want to move as far as you possibly can from the “sending your accountant a bunch of shoeboxes” approach!
I personally use QuickBooks, and the more I come to understand it, the more accurately I can classify everything, meaning there are fewer queries and items to reconcile from my “ask my accountant” section.
Ultimately, the less time the accountant is spending on the basic admin, the more time they have to work deal with the more important issues, such as effective tax planning.”
8. Bank Account Reconciliation is The Way to Go
Kevin Vandijk, CEO and owner at Tree Online, says, “The first step I take in closing my end-of-year books is to make sure all accounts are reconciled, and I chase up any outstanding checks or deposits that haven’t yet cleared.
Once this is done, I review all the balance sheets for credit lines, leases, and loans, and verify the closing balance on December 31s matches the official statements.
9. Use a Modern Accounting System
Anthony Appleton – Tattersall of AAT Accounting Services informs that “Through the use of modern accounting software such as Xero, the books are live and shared between client and accountant using cloud technology. The accountant does the usual end of month or end of year processing, but Xero does the entire “closing the books” thing by itself, automatically. All I do as far as closing goes is set a lock date so that no one accidentally changes things in past periods.
Closing accounting books is a vital process that allows you to gather and review the precise information about your company’s finances from the year. Besides, the entire set of data made out of this process helps to prepare and file taxes accurately on time. Follow the above-shared tips to close your books properly at the end of the year.
At Cogneesol, we make closing an effortless process for business owners by providing them with high-quality online bookkeeping services. We have a team of professionally trained bookkeepers that ensure your books are maintained and kept clean and organized for you to have a clear picture of your finances and perform the closing process without any hassles.
Learn more about our bookkeeping and accounting services; call us at +1 646 688 2821 or email at firstname.lastname@example.org
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