Getting Ready for 'Auld Lang Syne' - Part 1

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Even though most modern accounting systems are 'perpetually' saving a lot of work to formally close one year's 'books' and then open the new year's 'books,' there is still a lot of work that should be done at 'year-end,' and in the days and weeks leading up to it. I mean, you wouldn't expect to hold a gala New Year's Day feast without having prepared for it well in advance would you? So why should your accounting take a back-seat to that, right?

By looking at the various tasks that must be accomplished at year-end, it should give you ideas about what needs to be done leading up to those tasks.

Reconcile all bank and credit card accounts

Reconcile each account to its statement. Review your year-end bank reconciliations for outstanding checks more than a year old and verify or void checks as appropriate.

So, leading up to your year-end reconcile you should begin that analysis of outstanding checks. You may need to call a vendor to find out why a check has remained outstanding, or you may need to issue a replacement. In other words, just because you may do your voids at year-end doesn't mean you should wait to take care of outstanding checks that will need more attention than a simple 'void'.

Verify petty cash entries

Make certain all petty cash entries are up-to-date and that your petty cash account is in-balance.

This helps to ensure that you don’t miss any expenses that impact your bottom-line and tax returns. Sure, it’s only ‘petty cash’ but still, it can add-up to a substantial sum of money.

In the example here the various deposits were posted to the petty-cash account as funds were made available for expenditure from the petty-cash box, or envelope, or bank-bag. Just one problem, while all the receipts were stuffed in the box, envelope or bag, nobody took the time to record those receipts and to post them as to their proper expense. Without the offsetting disbursals, this petty-cash account becomes nothing more than an account into which cash is transferred, it has no effect on the bottom line even though you likely have paid-out every penny.

Make Year-end Accrual adjustments and corrections

If your business accrues payroll and liabilities, or prepays any expenses like insurance, services, or others, which you then report as a ‘prepaid asset’ you may need to make a journal entry to ensure that these accruals and prepayments are handled appropriately as part of your year-end.

Make certain to consult with your accountant or tax preparer to determine if any of these entries need to be cleared or adjusted in terms of reporting method.

Close Your Books

Closing the books refers to the accounting process of zeroing out your Income and Expense accounts and recording the company’s Net Profit or Loss onto the Balance Sheet. When books were kept manually, ‘in actual books,’ the ending balances were posted as the opening balances in a new set of books, and the prior set of books were not only closed but locked away.

Today, computerized accounting systems have different processes for closing the books at year-end. Both QuickBooks Desktop and QuickBooks Online are designed to be ‘perpetual’ accounting systems, so there is not actual ‘zero-out’ and posting of opening balances for the new year. Rather, QuickBooks automatically closed your Income and Expense accounts and rolls up your net profit or loss into the Retained Earnings account.

Both QuickBooks Desktop and QuickBooks Online allow you to set a Date and Password whereby you restrict access to transactions occurring on or before the date you set. This prevents changes and protects the integrity of your accounting data. Users should ‘close their books’ by setting their year-end date and a special password as part of the year-end process.

Adjust Retained Earnings

Retained earnings are profits from earlier accounting periods that have not been distributed to the company's owners. At the end of your fiscal year, QuickBooks computes your profit (or loss) and records it into an equity account named Retained Earnings. You can make transfers to the Retained Earnings account from the registers of other balance sheet accounts; or you can use Retained Earnings in a general journal entry.

While you might adjust the Retained Earnings account to track funds withdrawn by, or distributed to, company owners, Intuit recommends that you create a separate equity account (commonly called Owner's Draw or Distributions) for these transactions. Using this method, you can easily see the total funds withdrawn by the owner as well as the individual transactions that make up the total amount.

Your business structure (partnership, LLC, S-corporation, etc.) can significantly impact how earnings should be reported. The following summarizes the various equity reporting standards as a guide to assist you.

Sole Proprietor

A sole proprietorship is owned by only one person; therefore, the only account in the equity section of a sole proprietorship should be “Capital.” Whether they are funds or assets contributed by the owner, a distribution from the entity – or net earnings closed out at the end of the calendar year – everything should be rolled into the “Capital” account. You will therefore need to make a journal entry to move the ‘Retained Earnings’ QuickBooks automatically posts to the Owner’s Capital account.

Partnership

A partnership must include at least two partners. The equity section of the balance sheet in a partnership uses a capital account to track the running investment of each partner in the partnership. While Intuit recommends QuickBooks users create separate distribution accounts for each partner for use during the year, at the end of the year, those distributions should be closed to each partner’s capital account, as are each partners’ respective profits (or losses).

Limited Liability Company

The de facto accounting for an LLC is partnership accounting, and according to the AICPA the proper equity accounting is ‘Member’s Equity’ not ‘Member’s Capital,’ so that’s a bit of a terminology variance over a traditional partnership. You will need to be closing each members’ respective profits (or losses) to their Member’s Equity accounts at year-end.

Corporations (C or S)

In addition to the Retained Earnings account that QuickBooks automatically creates, your corporate balance sheet will most likely have a ‘Common Stock’ and an ‘Additional paid-in Capital’ account. Your accountant can guide you as to any changes that might be appropriate to these two equity accounts, but remember QuickBooks automatically closes your year-end income or loss to the Retained Earnings account such that it reflects the cumulative earnings over the lifetime of your corporation.

Your accountant can advise you concerning the appropriate 'specific adjustments' to the Retained Earnings account for purposes of reporting to each appropriate equity account based upon your own business structure.

In our next installment of this mini-series we will look at additional year-end closing requirements to help you get ready for ‘Auld Lang Syne.’