Small Business Accounting: How To Close Your Books At The End of the Year
It’s the most wonderful time of the year…until you realize you have year-end accounting processes to take care of. Closing the books can be an intimidating process, especially for new business owners.
That’s why we’ve broken down the process into 17 manageable steps. It sounds like a lot now, but these key steps will help you gain control of your accounting and get you ready to ring in the new year. To make things even easier for you, we’ve also created a printable Year-End Accounting Checklist so you can mark your progress.
|Small Business Year-End Accounting Checklist (PDF)|
You can print the Year-End Checklist now and use it to follow along, or you can jump right in. You’ll be closing out the accounting year with confidence in no time.
Table of Contents
- Step 1: Create Invoices
- Step 2: Send Invoice Reminders
- Step 3: Record Expenses
- Step 4: Separate Personal & Business Expenses
- Step 5: Update Mileage Log
- Step 6: Pay Bills From Vendors
- Step 7: Pay Contractors
- Step 8: Reconcile Your Bank Accounts
- Step 9: Update Fixed Assets
- Step 10: Run Depreciation
- Step 11: Decide On Employee Bonuses
- Step 12: Double Check Payroll Taxes
- Step 13: Verify Employee Information
- Step 14: Count Your Inventory
- Step 15: Run Reports
- Step 16: Create A Company File
- Step 17: Close Your Books
- What Comes Next?
Step 1: Create Invoices
One of the most important aspects of closing out your business’s financial year is to make sure all income and expenses are recorded and up-to-date. If you have any unbilled invoices, don’t wait any longer to send them. Get all unbilled projects and orders invoiced immediately.
Step 2: Send Invoice Reminders
On that same note, if you have customers who haven’t paid their invoices yet, follow up with them right away. Most accounting software allows you to email invoice reminders. Take advantage of this feature and get those invoices paid as soon as possible.
If there is a client who will not or can not pay you, then you can write off unpaid invoices as bad debt as a last resort (so long as you’ve made sufficient efforts to collect payment). Before you do this, talk to your accountant and read what the Journal of Accountancy has to say about bad debt to learn if this course of action is right for your small business.
Step 3: Record Expenses
If you’ve fallen behind on recording and categorizing your expenses, now is the time to catch up. Make sure all expenses are entered into your accounting software. Not only is this crucial for accurate record-keeping, but it will also help your accountant find all of the tax-deductible expenses your business qualifies for.
Recording your expenses throughout the year can help make this process much simpler.
Step 4: Separate Personal & Business Expenses
Ideally, small businesses should have a separate bank account for business expenses. However, we know this isn’t the reality for many smaller businesses and freelancers. That means you must separate your personal and business expenses.
If the IRS suspects that your small business deductions are actually personal expenses, then you are in great danger of an IRS audit. That’s why it’s incredibly important to keep your business expenses and personal expenses distinct. Some accounting programs, like Wave and QuickBooks Self-Employed, allow you to separate expenses easily.
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Step 5: Update Mileage Log
With tax season right around the corner, you’ll want to make sure your mileage log is up-to-date so you can maximize your small business tax deductions.
Step 6: Pay Bills From Vendors
In addition to making sure all of your customers pay you, you need to square away any unpaid vendor debts your small business has accrued.
Step 7: Pay Contractors
Also be sure to pay your contractors in full before you close your books.
Step 8: Reconcile Your Bank Accounts
Once all of your income and expenses are properly recorded, be sure to reconcile all of the bank and credit card accounts for your small business. You want to make sure that the income and expenses recorded in your accounting software match the totals from your official bank statements. If they don’t, there’s a discrepancy or mistake somewhere that you’ll need to address.
Reconciling your accounts once a month can help this process be run smoother and take less time.
Need help reconciling your accounts? Contact your accounting programs’ help center or ask your accountant for assistance.
Step 9: Update Fixed Assets
Before you close the books, make sure all of your fixed assets are up-to-date. Add any new fixed assets that you may have forgotten.
A fixed asset is a long-term asset with a life that lasts longer than a fiscal year.
For example, if your company purchased new computers, these would be considered fixed assets rather than expenses. Even though you paid for them as an expense, a computer’s life lasts longer than a single year making it a fixed asset instead.
Step 10: Run Depreciation
For all of your fixed assets, you’ll need to run depreciation for the year. Remember how fixed assets last longer than a year? Well, depreciation is how the IRS determines how much of that asset’s life has been used up in a year. You can write off the amount that has been used as a tax deduction.
If you need help understanding these concepts, read what Investopedia has to say about depreciation or talk to your accountant for more details. Your accountant can also assist you with running depreciation, or you can run depreciation yourself using accounting software programs like Xero and QuickBooks.
Step 11: Decide On Employee Bonuses
Before the end of your financial year, decide whether or not your company will be offering employee bonuses. If so, you’ll need to set aside the proper withholding tax.
Step 12: Double Check Payroll Taxes
According to CPA Michelle Edward, you’ll want to ensure that your payroll tax liabilities match your quarterly payroll returns.
If there are any discrepancies, talk to your accountant to get everything squared away before you close the books.
Step 13: Verify Employee Information
Go over all current and past employee and contractor information for the year and verify that the information you have on file is 100% correct. It might be worth even sending an email to your team to check if there have been changes. Employee contact information must be correct in order to send out W-2s and 1099s before tax season, which is right around the corner.
Step 14: Count Your Inventory
Next, you’ll need to do a final inventory count. Do this count on the day you close your books (for many businesses this will be December 31st). Small businesses are expected to record their inventory at the beginning and end of each year as these totals are used on several tax forms.
Read our post How to Get the Most Out of Your Accounting Software This Season to learn more.
Step 15: Run Reports
Use your accounting software to run a Profit & Loss report (or Income Statement) and Balance Sheet report. Analyze both reports and verify that the information you see is correct.
You may also want to run your Statement of Cashflows report and get ahead of the game by running the key reports your accountant will need for taxes.
Step 16: Create A Company File
I can’t emphasize how important this step is. Once you’ve completed steps 1-15, create a company file of the year’s data. The last thing you want is to lose access to important accounting data from the year. Your accountant will also need access to your company file in order to make any necessary year-end adjustments and to file taxes.
Step 17: Close Your Books
Once you’ve completed every step and checked off each part of your Year-End Checklist, you can officially close your books! Luckily, accounting software makes this process easy.
When you close your books or set a lock date, users won’t be able to edit or add transactions that occurred before the closing date. Most often, the business owner will set a password so that only admin and accountants can access previous transactions. This helps your accountant double check that everything is up-to-date and make adjustments if needed.
Most accounting programs like QuickBooks and Xero let you close the books and even set a lock on closed periods. You can search your software’s help center for instructions, or you can talk to your accountant and have them do this for you.
What Comes Next?
Once you’ve closed your books, be sure to get your company file and all necessary reports to your accountant so they can make any adjustments and start calculating your small business’s tax deductions.
Now that you’ve closed your books, keep the momentum going and start preparing for tax season. Don’t let April 15th sneak up on you. Instead, find out How to Get the Most Out of Your Accounting Software This Tax Season and check out our complete Tax Prep Checklist. Take time as well to read What Can I Write Off As A Small Business Tax Deduction?
You can find these tax resources, and more, on the Merchant Maverick blog.