What is a period-end routine, and why do them?
You’ve been doing the bookkeeping and you think you’re up to date with everything. How can you be sure that everything that you’ve been doing over the last few months is correct? The simple answer is you can’t. It’s bad practice to assume that everything is ‘hunky-dory’ just because you are using software and have several app integrations to help you work more efficiently.
Before we get into more detail at the sort of things we should review, let’s look more at the ‘why.’ The below will follow some accounting principles that you may be familiar with.
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Accuracy
The data needs to be as accurate as possible. Inaccurate data can lead to inaccurate tax calculations. Reports showing that you’re are in profit, when making a loss and vice versa doesn’t help anybody. Whether it’s for tax returns, seeking investment, loan applications, preparing commissions (the list goes on), accuracy is the number one priority.
Consistency
When we review reports like our profit and loss, we should be looking to make sure that nothing out of the ordinary ‘jumps out.’ If wages are normally $15,000 a month, then they should be checked in detail if they suddenly appear to report as $25,000
Relevance
How relevant is the way data is being presented in reports, and how relevant are the transactions to the business? For example, mixing personal transactions with the business is never a good thing to do, and using unnecessary chart of account codes can make things look confusing.
For large businesses it may be necessary to have hundreds of chart of account codes splitting costs like travel, and insurance into multiple categories, but when always think if having such detailed split is vital. Often ‘less is more.’
Accruals and Prepayments (necessary for monthly reporting, and when the accounts are finalized)
If we are talking about accruals and prepayments, we are taking bookkeeping up a notch to that of a management accountant. Correctly accounting for these can help to maintain consistency in reporting.
For example, if a sales rep is going to be paid commission on sales a month after the sale has been made, the commission could be ‘accrued’ in the accounts to bring costs in line with the month of sales.
If you have received an invoice for 12 months insurance, the entire cost should not appear in one month alone – it can be ‘prepaid’ and then released to the profit and loss each month using journal adjustments.
Now that we’ve looked at why we have a period-end routine (also known as ‘housekeeping’), let’s look at what we should be reviewing.
What are we going to review?
Well, in all honesty, we really need to review everything. Here we are referring to a ‘period-end’ review. The frequency of what you review, (monthly / quarterly / annually) will vary depending on the size of your business. Some areas you’ll only need to look at annually if you are a relatively small business – just before the accounts are filed. For others there are things that need to be checked every month in some instances every week.
BALANCE SHEET
Bank Reconciliations (all banks, credit cards, PayPal, loans)
Reconciling our bank balances is a fundamental area of basic bookkeeping. We need to agree that our accounting records match those entries that have passed through our bank account. Sometimes there will be timing differences where a check could have been sent but it has not yet cleared the bank. This will be our ‘unreconciled’ item at a period end and should clear in the next month. Any items that are left ‘unreconciled’ after performing a bank reconciliation should be investigated if they are more than a month old.
As well as reconciling the main business bank, do not forget to reconcile any other savings accounts, loans, credit cards etc, that are in the name of the business.
Undeposited Funds / Cash Control Accounts
Where cash and card payments are received and temporarily banked into a cash control account before transferring to the business bank account, ensure that these balances are regularly cleared. If there is a large cash build up, it can either mean that the business owner has taken the cash for personal use, or perhaps there has been some duplications in the way that sales have been recorded. VERY IMPORTANT TO CHECK!
Trade Debtors – Accounts Receivable (list customers that owe money)
This area should be reviewed constantly. Check to see if customers need chasing for payment, if there are any issues with services or items provided to the customer. In the worst-case scenario, do we need to consider writing off any invoices as a bad debt? Review any small balances that may need writing off due to rounding differences, and any credit balances that need to be refunded or adjusted.
Trade Creditors – Accounts Payable (list of suppliers that money is owed to)
This is pretty much the mirror image of customers. Are any supplier invoices ‘in dispute’? Have we been over-charged? Are there any duplications within any of the suppliers?
VAT / GST Sales Tax
Depending on your country, and whether you collect sales tax on your invoices, review when the last return was filed. If the tax has been paid, ensure it has been correctly marked as such. Ensure that your balance sheet accurately reflects the liability to be submitted and any VAT/sales tax filed but not yet paid. If VAT/GST Sales tax is reported on a ‘cash basis’ you may need to run a few more reports to ensure that everything is as accurate as it can be.
C.I.S. (Construction Industry Scheme Tax – UK)
Businesses that work within the construction industry may need to withhold tax from their sub-contractors. They themselves may suffer tax deductions. Balance sheet accounts for either tax withheld or suffered should be regularly checked and reconciled.
Employee Liabilities
Check that all employees have been paid to date. Employee deductions must be paid across to the appropriate agencies – tax/insurance/pensions/childcare/other. If there are unpaid liabilities on the balance sheet it is important that you know what they relate to and understand when they need to be paid.
Accruals and Prepayments
Review any balances where provisions have been made, and if necessary, create journals to adjust the appropriate profit and loss categories.
Stock
If there is a balance for stock on the balance sheet, does this accurately reflect the value of stock held? Is a stock-take required? Adjust stock quantities or values where necessary.
Work-In-Progress
Businesses like accountants, law firms, architects provide services and adjustments may need to be made for the time spent but not yet billed to clients. This works like stock, so provisions may need to be made for fees not yet invoiced.
Fixed Assets
The value of fixed assets held on the balance sheet should agree to the fixed asset register. Check that the correct amount of depreciation has been provided against assets held. Review new asset purchases and ensure they have been added to the asset register.
Goodwill
If goodwill had been introduced, is any amortization required?
Inter-Company Loans
If the business is part of a group or has some ‘related’ companies, it is common that funds may get lent between the different organizations. It’s very important these balances are checked with the other companies so that everybody agrees how much is owed from and to each business.
Anything else?
There are likely to be other things, but the above are the most common with regards to a balance sheet review. Basically, every balance sheet account should be reviewed thoroughly prior to preparing final accounts at the end of a financial year.
It’s a good idea to compare the balance sheet (when possible) to the previous year. Now that you’ve reviewed the balance sheet, review your profit and loss reports…… We'll discuss that in Part Two next week!
For more information on this topic, make sure to register for our webinar, "Save time with nettTracker - fixed assets made easy" on December 8, 2020 at 4:00 p.m. Eastern Time. You can register here.