The Year End Guide for Small Businesses
Every business goes through seasons. Whether you launched your business in 2022 or are a seasoned entrepreneur, the ebbs and flows of business keep us all on our toes and sharp as we change with the times.
One season that has every business owner burning the midnight oil is the end of the year. Aside from the holiday activities, business owners and their accountants have a long list of duties that need to be accomplished to make for a successful upcoming year and optimized tax return.
Why is the end of the year so important?
When it comes to finances and your tax return, the end of the year marks a close to many activities. For some businesses, it is the end of their fiscal year but for all businesses, December 31st is the very last day of the year their activities will be reflected on their financial statements.
No matter what happens on January 1st of a new year, in most cases the IRS will only recognize the event in the tax year it took place. For example, if on January 1st, Year 2, at 12:01 an invoice is paid, inventory is sold, or even if a business were to officially dissolve, it would not show up on your tax return until you are filing Year 2 taxes.
Aside from your fiscal and tax year ending, the new year is an excellent time to reset. During this time many businesses may be reconsidering their operations, marketing strategy, processes, or any number of activities within their business. Most, if not all, will be affected by the choices made in your accounting department - so it is best we start there!
Tasks to be Completed
Below is a list of some common tasks we recommend completing at year end. Oftentimes this will be done by your accounting department but knowledge of these activities makes for responsible business ownership.
Your understanding of these tasks will allow you better see the big picture and have conversations with your accountant in hopes to optimize your entire operation.
Collect past-due invoices
With the year coming to an end you will want to finish strong, which for many businesses means collecting on open invoices.
Sometimes these open invoices are uncollectible. As a result, the income will be recognized on your financial statements as bad debt. Your bad debt may be tax deductible. If you do take the deduction on your upcoming tax return, you will want to ensure the invoice is in fact uncollectible.
Asset Management: Inventory & Depreciation
When the clock strikes midnight on New Year's Eve, the inventory on your shelves should be the inventory reflected in your financial reports. Of course, businesses try to get as close to this as possible, and with the help of inventory management applications, this is a much easier process than it was just a few years ago.
Nevertheless, part of ending the year with accurate reports involves an inventory management system with accurate numbers when the calendars turn over.
Another part of your asset management is going to include updating your depreciation schedules. Depending on the assets you are depreciating and the method used, this is likely something your accountant will want to review and update annually, typically at the year-end.
Reconcile bank accounts and credit cards
If your bookkeeping is behind, now is the time to catch up. Bookkeeping is generally something you will want to be updated regularly due to unforeseen issues that can arise. Waiting until the end of the year can present many problems but waiting until your taxes need to be submitted can cost your business.
Get documents / receipts ready
If you have been practicing good record-keeping habits throughout the year, this will most likely involve confirmation everything is properly organized. If you have yet to have everything backed up, this can be a more lengthy process.
Documents you will want to have organized and ready include:
Bank Statements: It is likely throughout your business you will add or delete bank accounts. You may even move banks. Keep copies of all your bank statements if you ever need to refer back to them.
Reconciliation Reports: These reports should be generated by your bookkeeping application and recognize totals in your app that match your bank statements. They are essential in trusting your financial statements are accurate.
W-9s: 1099-NECs are due in January and the turnaround from the holidays is quick. Having your W-9s ready and on hand will help make for a quick turnaround. This should be part of your onboarding process.
W-4s: Like W-9 you will want these on hand to provide for a quick turnaround to submit W-2s to your employees. This too should be part of your onboarding process.
Receipts: Keeping records of your receipts is another check in making sure you have the proper documentation should any questions arise surrounding your financial statements. Talk with your accountant about efficient ways to manage your business’s receipts.
Complete closing schedule
Everything reconciled, ticked, and tied? When you have made your very last reconciliation or adjustment for the closing year you will want to “close the books”. In most accounting applications, this is just a button your accountant pushes but it signifies everything for the year has been completed and is up to date.
This is an important step to ensure reports are consistent for future use. For example, let’s say an adjusting journal entry is made months later that affects the closed-out year. When the books have already been closed, your application will warn you that to make the adjustment you need to reopen the books.
Why is this important? One example is if you have already submitted your return with information this adjusting journal entry will affect, you may need to amend your submitted tax return.
Ready to end the year strong? The end of the year requires a lot from business owners and if you are unfamiliar with many of these accounting tasks it is best to talk with your accountant about your business’s processes for managing these.