Accounting is often the bane of the small business owner, but it is an essential part of running a successful business. To do it right and avoid unpleasant tax problems, your books need to be closed at the end of each accounting period. If done correctly, keeping and closing accurate accounting books can be easy and stress-free.
Clean up Your Books
Before your accounting books can be closed, they need to be accurate and up to date. Accurate books give management and investors a precise picture of the health of the company. The easiest way to keep clean books is to do the accounting correctly throughout the year. A powerful, cloud-based accounting software, like Sage One, makes this easier, even if you need to travel a lot during the year. Because Sage One is online, you can access it from anywhere, and it enables you to easily send invoices and pull reports. Make certain all of your entries are accurate, your accounts are up to date and your accounting categories tell the story you want them to tell.
Collect or Close
For businesses that offer credit terms, there is the risk that some people will not pay. It can be hard to differentiate between open debt and bad debt. A late payment is not necessarily a bad debt. Before you close your books, decide what is bad debt and then write it off as a loss. The basic school of thought is that the moment a debt goes to collections, it should be written off. In practice, most people write off bad debt annually as part of the year-end closing.
Do a Trial Balance
A trial balance is a list of all debit and credit accounts and their balances. It is used to move forward and prepare your financial statements. If done properly, the trial balance, as the name implies, balances your books. The trial balance gives your accountant a snapshot of your accounts, making it easier to find errors and identify items that require an adjustment.
Know Your Adjustments
There are two types of accounting: cash and accrual. Generally Accepted Accounting Principles (GAAP) mandates that proper books use the accrual process that books revenue and expense at the time that it is incurred and not when it hits the bank account. There may be some things you know will be coming in, but the actual money will not be received until the following period. Interest and some accounts receivable items will be adjusted on your books. Likewise bad debts will be adjusted at this time.
Prepare Financial Statements
Financial statements are one of the most important items to come out of good accounting. They show the health and financial strength of the company. Financial statements are composed of four reports: income statement, balance sheet, statement of cash flow and statement of change of equity. These reports work in unison to give the reader a snapshot of the company at a fixed point and a longer view over the entire accounting period.
Go Back to Zero Balances and Prep for Next Year
At the end of the accounting period, bring all of your credit and debit balances to zero and roll them over into the next year. This is done by doing a journal entry that applies the net income or loss to the owner’s equity. To make everything easy for next year, set up your accounts using this closing experience as a template for the next year.
Closing your books doesn’t have to be stressful or difficult. Maintain good accounting and bookkeeping practices all year round to help you finish everything on a good note at the end of the year.