Another year has almost come and gone, and 2020 proved to be quite a challenge. But, before we can put 2020 behind us and open the doors to 2021, we have some cleanup to do. No, we don’t mean your desk drawers (although that may help). We are referring to accounting cleanup—making sure your accounting records are detailed and accurate.
For most businesses, it may feel as though you just finished last year’s tax return, but taxes are not the only reason to keep your accounting records clean. Your financial statements tell the story of your business and can provide insight into the future. Cleaning up your accounting, analyzing your financial statements, and talking to your tax advisors will help ease your business into a bright 2021. Here are a few cleanup steps to consider as the year ends:
- Verify that your beginning retained earnings on your balance sheet agrees with what was reported on last year’s tax return. Your tax preparer may have made accounting updates or corrections while preparing your tax return. Post any adjusting journal entries they have added and compare your updated balance sheet to the final tax return to identify discrepancies.
- Verify loan balances agree with your financial statements, and interest expense is properly recorded. Check your principal balances for all auto, mortgage, or other bank loans stated on the December loan statement and confirm the balance sheet liability account is accurate. Be sure to verify that any new loans funded in 2020 have been properly recorded.
- Do an inventory of fixed assets. Are all the assets listed on your depreciation schedule still in use, or are they obsolete and eligible for the write-off? Have any assets been sold? Are there any new assets that should be added? For new purchases, keep records of closing statements, loan agreements, or purchase documents. Make sure new assets are properly recorded and depreciated based on your company’s capitalization policy.
- Gather Paycheck Protection Plan loan forgiveness documents. To substantiate payment of eligible expenses during the loan covered period, gather payroll reports, business utility bills, rent or lease payments, and business mortgage payments. Consult your loan forgiveness application package for specifics of the required documentation. Remember, a borrower has ten months from the end of their covered period to file for loan forgiveness before repayment begins.
- Review 1099 vendor information. 1099 Forms will be due to recipients by February 1, 2021. Avoid the after-holiday rush to compile reports. Start verifying W-9s have been properly completed, and the addresses and identification numbers for Form 1099 recipients are correct.
- Review account categories. Are your transactions categorized properly? Or do you have items in uncategorized or miscellaneous accounts that need reclassification? Do new accounts need to be added or merged to categorize expenses effectively? Are your income and expense accounts labeled in such a way as to provide quick insight into your business transactions?
- Review accounts receivable. Run an Accounts Receivable Aging Report and check for accuracy, possible duplicate income, or unapplied credits. Reach out to customers with invoice reminders to collect a payment and write-off uncollectible amounts if necessary.
- Review accounts payable. Determine if outstanding bills to vendors are payable and review for discrepancies or unapplied credits. Cash basis taxpayers may want to accelerate deductions by paying bills before year-end. Also, reconcile all intercompany payables and receivables.
- Reconcile banking and credit card accounts. For bank accounts, check for uncleared transactions over six months old and verify whether those transactions are active, should be voided, or classified as unclaimed property. Make sure credit card charges are assigned to the correct expense accounts, and credit card payments have been applied.
- Begin inventory analysis. Take a physical inventory count and compare those numbers to the numbers generated by your inventory system. Make any necessary adjustments to reflect actual inventory on hand in your financial statements. Now is a good time to assess your level of inventory fraud risk and develop a plan to mitigate fraud in the future.
- Gather tax deduction documentation. If you use your vehicle for business purposes, is your mileage documentation in order? Have you tracked expenses related to your business vehicle? Do you have proper documentation for business-related meals and entertainment?
- Review sales tax documentation. If you make tax-exempt sales to customers, are your resale or exemption certificates on file and up to date? Have you added any new products that require a taxability review?
- Finally, start talking to your tax professionals about items they will need for your 2020 tax return. After your accounting has been cleaned up, send them a copy of your general ledger for reviewing. They may have questions, suggestions, or see something new that could benefit your company’s tax position.
This is just a handful of ideas on things you should consider reviewing to get your books ready to close out for 2020. With proper attention, this will hopefully set you up for a prosperous new year. As always, your ATKG advisors are available to answer any questions you have and guide you through the process.
Amanda Cagle is a tax professional with ATKG. She first joined the firm as an intern in 2018. Amanda received her Bachelors’s and Master’s degrees in Accounting from The University of Texas at San Antonio. She brings more than 16 years’ experience in the restaurant industry to ATKG. Amanda also volunteers with Junior Achievement of South Texas and speaks to young school children about the importance of personal finance.