Checklist for Closing Your Books at Year-End

One thing many business owners dread is the administrative and accounting tasks the law requires for running their business. But if you keep up on accounting matters throughout the year, it won’t seem like such an overwhelming burden at the end of your fiscal year.

Why Close the Books?

The term “closing the books” means that all financial transactions for the fiscal year are wrapped up, consolidated, and reported. This will show what income and expenses were generated and the company’s profits or losses during that time. Delineating these figures one year from the other ensures that the previous year’s figures aren’t carried over, potentially skewing an accurate accounting picture.

As a business owner, you can use this time and information to review the health of your business and get a good financial understanding of the past year. It sets you up for the next business year and provides you with the necessary information to file taxes for the year.

1. Make sure all projects and orders are invoiced and collected.

Before you close your books, ensure that everything is invoiced out and all income is recorded. For those clients who haven’t yet paid invoices, send out reminders to get payments in as soon as possible. This gives you time to determine if the payment will not be forthcoming, so you will have the ability to write it off.

2. Make sure all contractors, vendors, employees, and other bills are paid and up to date.

Ensuring all financial obligations are paid and up to date is vital for maintaining strong business relationships and securing favorable credit terms. This practice also prevents any end-of-year accruals of unpaid expenses that could distort your financial reports and tax obligations.

3. Categorize and record all business expenses.

Make sure that all previous year’s expenses are recorded and properly categorized so you can easily locate those that are allowable for tax deductions. It is also critical to ensure that all personal and business expenses are kept separate.

4. Make sure that your bank accounts and other accounts reconcile with your income and expenses.

While your income and expenses must be continually updated, they must also match your bank account and credit card statements. Even if you are using business bookkeeping software, it is a good idea to double-check all your numbers.

5. Check loan balances against lender’s statements.

It's essential to update your records to reflect the correct current balance of each loan, separating principal and interest components. This ensures accuracy in your financial reporting and aids in correct interest expense recognition. Additionally, verifying these balances against the lender’s statements helps to identify any discrepancies early, preventing potential issues during audits or financial reviews.

6. Check your payroll taxes.

You need to ensure that your monthly and year-end payroll expenses match. This should be done as part of reconciling your expenses and before you file your income taxes for the year. If you have questions about your payroll taxes, make sure to speak with a tax professional.

7. Verify employee and independent contractor information.

Make sure that you have all correct forms on file, including W-4s and W-9s for employees and independent contractors. It is important that you have the correct information to ensure that their W-2 and 1099 forms are going to the proper place, especially those who no longer work for the company. You may wish to send an email around to all current and former employees to ensure that your information is updated and correct.

8. Conduct a physical inventory check.

You need to determine your final inventory count at year-end. Recording inventory at both the beginning and the end of each year not only provides you with the starting inventory figures for the next year but is also essential for accurate tax reporting.

9. Depreciate fixed assets.

Depreciating fixed assets involves adjusting their book value to reflect wear and tear or obsolescence over the asset's useful life. This process not only aligns with tax regulations but also provides a realistic valuation of the assets on your balance sheet. Accurate depreciation calculations are crucial for proper financial reporting and can significantly impact your business's net income, thereby influencing financial planning and tax liabilities.

10. Run your financial statements.

Your profit and loss statement and balance sheet provide a comprehensive overview of your business's financial position at the end of the year. Ensuring your general ledger balances are accurate is crucial as it sets the foundation for the upcoming year. Accurate records streamline and simplify the tax preparation process and once everything is in order, you can set your lock date and close your books for the year.

While closing the books at year-end and performing other required administrative tasks for your business may seem daunting, understanding how the process works and what is required takes away some of the mystery of business ownership.