Believe it or not, we are nearing the close of another year. If you are a small business owner you can ring in the New Year with peace of mind by taking a few simple steps now.
Account for all of your transactions – bank, cash, and credit cards. Make sure that you have all of your month end statements and documentation. Get your Bank Reconciliation Statements. It is good practice to prepare this monthly. You will need to look for any differences in your bank statements against the entries in your register. You are looking for
Most of you are using the cash-basis accounting method (essentially, what matters most is cash coming in and going out of your bank account). If so, you need to keep track of prepaid expenses and income. These prepaid items need to be separated from standard expenses and income as they are going to be an asset or a liability and need to be recorded as such on your balance sheet.
If you have received bills for certain expenses which will be paid later and would like to record them as current year expenses, you can only do that if you are using an accrual accounting method (essentially, what matters most is what is owed to you or by you, not the actual cash payments). However, if you make sure to pay the bills before the end of the year than they would qualify as valid expenses under the cash-basis accounting method.
You will also need to account for non-cash expenses like depreciation. If you have identified certain debts as non-recoverable, show them as bad debts. Keep track of your fixed assets. If you have added assets or disposed of them you will need to verify that these entries have been made. If you are planning to buy any new assets in the near future, it is better to buy it in the current financial year. You will be able to reduce your current year tax liability and benefit from depreciation. Of course, these transactions are based on the current requirements and current financial status of business.
Certain expenses, such as staff salary must be paid by year end. You do not want to carry this into the next year as an outstanding expense. You can reduce your current year income by delaying some of you fourth quarter sales orders to the next year. Once again your tax savings is dependent on the financial status of your business.
Finally, you will need to account for income accrued for the year but not received. This depends on your method. As previously mentioned for the accrual basis it will be recorded as Income (period!) for a cash basis it will not be recorded as anything – it is not an income until payment is received. Now what it means when I say “account for” is to determine whether these should remain as open accounts receivable or whether they should be written off as a bad debt. Typically if it is over 90 days it should be taken off the books and written off as a bad debt (providing a deduction to cancel out the income).
Once you have accounted for and entered all of your transactions into your accounting system you can generate your year end financial statements. These statements include your Profit and Loss Statements and Balance Sheet. Review the statements to ensure there are no inaccuracies or abnormalities.
These few planning steps will not only prepare you for tax time but will enable you to plan for next year. Then you can relax and enjoy a peaceful year end.