Whether you close the books yourself, or you delegate it to your in-house team or outsourced accounting group, it’s good to know what should be done to properly close the books and ensure you can have confidence in your numbers. While clean books and records may not mean much to you on a daily basis, it means a lot to key players like your investors, bankers, and auditors. There are some often overlooked tasks related to closing your books for the year that will give you the ultimate confidence in your numbers as you plan for the new year.
If you don’t use crypto in your business, read on… there is a lot that applies to you too.
With all accounting closes, there are the “normal” monthly accounting activities, like bank reconciliations and journal entries and then there are the year-end final reconciliations that allow you to get your books both finalized and ready for your tax accountant and auditor. These tasks are often overlooked by in-house bookkeepers and are sometimes caught by your accountant, but not always. When it comes to closing the year, an ounce of proactiveness is worth a pound of cure. If you incorporate our suggestions into your monthly or quarterly closing process, and not wait until year-end, we can guarantee your year-end closing will be a lot less painful. We’ll break it down for you below.
Things you should be doing monthly to close your books:
If you aren’t reconciling your books monthly, we strongly suggest you make it your goal for this year. You’ll catch errors and issues before they spiral out of control, and you’ll have more timely financial information to course-correct performance if something isn’t going well.
- You should reconcile not only your bank accounts– even those with no activity– but all your credit cards loans, leases and, lines of credit.
- Review your reconciliation reports for uncleared transactions as uncleared transactions could impact your P&L and give you an incorrect cash balance.
- Book your monthly accruals for payroll, pre-paid or deferred revenue or expenses, depreciation and other amortization costs.
- Reconcile your crypto accounting system back to your accounting ledger and ensure that they match. Identify any exceptions or discrepancies and address them as soon as possible.
- And, of course, do a thorough review of your books for errors and miscategorizations.
Year-end reconciliations and activities:
The end of the year brings more accounting activities than the normal course of closing the books. If you are reconciling your books monthly, year-end closing should not be as time-consuming. What we don’t like to see are big entries from the accountants at the end of the year to correct errors, do the “true-up” adjustments to get systems to tie to each other.
- Reconcile your payroll in your accounting ledger to the payroll provider reports, so you can identify and correct any issues before final tax documents are filed. This will highlight issues with your balance in your ledger or identify if the payroll provider made an error which is often common.
- If you use third party apps to feed data into your ledger like a sales, expense or billing system, (including crypto accounting systems) make sure you reconcile those systems to what you have in your P&L and balance sheet. Do they tie? If not, it’s important that you find out why. Reconciling systems can be a big hornet’s nest to unwind if the problems persist for months.
- Review prior year accruals or reversing entries to see if they need to be adjusted or re-accrued.
- Review your P&L and Balance Sheet for reasonableness and obvious errors.
Give your balance sheet some love:
The balance sheet has been a long-neglected financial statement for most small businesses. It’s where novice bookkeepers often book transactions they don’t know how to handle or want to “park” until they get around to figuring out where it belongs. Unfortunately, balance sheet mismanagement may come back to haunt you, as auditors and bankers look there first, and unwinding balance sheet errors can be time consuming and expensive.
- Look at your P&L for large expenses– should any of them be capitalized? Even if you are taking a section 179 deduction, it is a good practice to put your assets on the books and fully depreciate them vs. expensing them right away.
- Review Accounts Receivable (AR) for old balances and determine if you should write them off or write them down on the invoices themselves by issuing credits vs. a journal entry. Another good thing to do is to make sure your AR Aging report total ties to the AR balance you have on your balance sheet.
- Review Accounts Payable Aging report for old bills that will not be paid, or have been paid but weren’t accounted for properly. Going into the new year with a clean AP report will help in your cash flow forecasting.
- Look at all of your pre-paid and deferred revenue and expense accounts and take an extra look at your liability accounts to make sure they are reasonable and are well maintained (i.e. relieved or cleared monthly).
- Review your cap table and equity accounts to ensure you can reconcile them and all entries have been made.
…And don’t forget about the extra care needed in your year-end crypto accounting
Year-end crypto accounting requires an added level of “love” to ensure that your tax accountant has a clear picture of the tax implications of all your transactions and your P&L and balance sheet are representative of your actual positions. If you’re maintaining your crypto transactions on a spreadsheet, or if they don’t feed into your General Ledger system, you have the added challenge of ensuring that it has all the necessary data you’ll need to calculate cost basis and categorizations so you can book it appropriately into your financials. There are many excellent apps to track your crypto. (If you need suggestions, give us a call.) Whatever method you choose to track your crypto, you’ll need to make sure you do the following:
- Make sure every transaction is recorded (big or small)
- Make sure the cost basis is identified at time of the transaction
- Properly classify transactions as taxable or non-taxable, i.e. sale, payment, transfer, purchase, air drop, fork, swap, any DeFi lending, minting, mining, staking, etc.
- Or, if you are using a third-party ledger make sure you reconcile that system back to your accounting general ledger and correct any differences. This should be done monthly, at a minimum, to identify and correct any exceptions or discrepancies.
Put a bow on it: the final steps
- When you are done with your reconciliations and cleanup, close the year in your accounting system. In QuickBooks that means locking the period so you don’t accidentally make changes to a prior period.
- If you are using an online ledger like QuickBooks, back it up using a backup tool like Rewind, or at a minimum, download a detailed general ledger report, AR aging and AP aging detail report. The same goes for your crypto ledger system, by downloading all year-end reports you can. While we love the cloud, having that “point-in-time” snapshot is a good reference point if you ever need to look back.
- When you are done with your bank reconciliations, issue your 1099s to your vendors.
Whether you are happy to put this year behind you or are happy with the way your business performed, you still have to wrap up the year the right way, especially if you have crypto transactions. Clean books, while not sexy, will not only save you money with your accountant, but it could save you a sizeable tax bill if you take the time to record your crypto properly, clean up your balance sheet and ensure things are ticked and tied.
If you need help getting your regular or crypto accounting year-end activities completed, give us a call. We’ll be happy to help.