10-Step Guide to Closing Your Books at the End of the Year

For small business owners, the end of the year means wrapping up loose ends financially. This process is known as “closing the books” in accounting. Ensuring that every dollar attributed to a year is accurately recorded is crucial to preventing the new year from being inaccurate.

The best accounting software, like QuickBooks Online, can simplify this task. However, there are many steps to take to ensure a clean slate and a successful tax season. Let's analyze this process in detail.

Why close the books?

Closing your accounting books at the end of the year is essential for several reasons:

• Accuracy: Ensures that all financial transactions are recorded correctly, minimizing errors and discrepancies.
• Compliance: Helps meet regulatory and tax requirements by providing a clear and accurate financial picture.
• Financial analysis: It allows you to evaluate the financial health of your business, identify trends and make informed decisions.
• Clean boot: Prepare your books for the new year, preventing past transactions from interfering with current accounting.

If you don't carefully account for one year's finances, you can start a chain reaction of wrong numbers in the future. This problem can lead to inaccurate tax returns, unreimbursed expenses, and a false conclusion of profit or loss.

10 steps to close the books

Hiring a certified accountant can be expensive for smaller businesses. But even without a professional accountant available, you can follow these steps to close your books effectively.

1. Reconcile your bank accounts

Reconciliation ensures that your bank statements match your accounting records, highlighting any discrepancies that need to be addressed.

How to do it

• Collect all bank and business credit card statements.
• Match each transaction in your accounting records to your bank statements.
• Investigate and correct any differences.
• Document the reconciliation process for future reference.

2. Review your accounts receivable and payable

Ensuring all customer and supplier invoices are correctly recorded and up to date helps maintain accurate financial records.

How to do it

• Review your open invoices to see which ones are due before the end of the year.
• Send reminders for overdue invoices and write off any bad debts.
• Make sure all invoices due before the new year are paid and recorded.

3. Update inventory records

Accurate inventory records are crucial to determining cost of goods sold and overall financial health. It also helps calculate losses so you can take steps to prevent theft and waste.

How to do it

• Perform a physical inventory count to verify your stock levels.
• Identify the items with the greatest losses and develop strategies to reduce these figures.
• Determine if insurance coverage or tax strategies can help mitigate the effects of inventory loss.

4. Record depreciation and amortization

Recording depreciation and amortization accurately reflects the value of your assets over time and impacts your financial statements.

How to do it

• Consult your accountant or IRS documentation to determine the appropriate depreciation method.
• Record items, such as real estate and inventory, that are subject to depreciation.
• Gather receipts and sales records to determine the current value compared to the original purchase price.

SEE: Computer hardware depreciation calculator (TechRepublic Premium)

5. Earn expenses and income

Accrual accounting requires that expenses and income be recorded when they are incurred, not when cash changes hands. Therefore, you will need to keep track of costs and invoices that occurred during the year, even if you have not yet received or sent payments for them.

How to do it

• Identify expenses incurred but not yet paid and income earned but not yet received.
• Once payment occurs, it should be applied retroactively to the current year's tabs.
• Misattributing a payment to the new year will give the false impression of more gains or losses for that year.

6. Generate financial statements

Financial statements provide a comprehensive view of your company's financial performance and are essential for tax preparation and strategic planning.

How to do it

• Software like QuickBooks Online can automatically generate reports in an instant.
• Alternatively, you can “follow the money” manually and add up each transaction.
• Double-entry bookkeeping is crucial for creating reports that leave a clear path to where every penny went.

7. Back up your financial data

Ensuring your financial data is backed up protects against data loss and makes future reference easier. This easy recovery avoids problems if the IRS requests an examination or if you work with an accountant.

How to do it

• Make copies of all documents. This process can be expensive with ink and paper, but it is worth it in the event of an audit or other problems.
• Back up digital files to a cloud storage service like Google Drive.
• Take photos or scan receipts and store them with other documents.

8. Review tax documents.

Reviewing and preparing your tax documents ensures you comply with IRS regulations and avoid potential penalties. It is also worth studying the new regulations that will come into force on January 1.

How to do it

• Gather all necessary tax documents, including W-2s, 1099s, and receipts for deductible expenses.
• Check the IRS website for announcements about new laws and policies.
• Consult your accountant or tax filing software to finalize your return.

9. Consult your accountant

A certified accountant can provide expert advice, ensure compliance with tax laws, and help identify potential problems. If you don't already have such a professional, consider making a short list of candidates to consider hiring as your business grows.

How to do it

• Schedule a meeting with your accountant to review your financial statements and tax documents.
• Discuss any discrepancies or concerns you may have.
• Make the recommended adjustments before finalizing your books.

10. Plan for next year

Planning for the coming year helps clarify financial goals and expectations. This forecast makes it easy to forecast how long it will take to reach the desired growth stage.

How to do it

• Review your financial performance and set goals for the coming year.
• Use valuable information from your financial statements to make informed business decisions.
• Update your budget and financial projections through software like QuickBooks Online.

Food to go

Closing the books at the end of the year is a critical task for small business owners. Ensures accuracy, compliance and a clear financial picture, especially as tax season approaches. Using accounting software simplifies this process by eliminating manual work, such as counting transactions.