Year-End Reconciliation for SMBs – Accounting and Close (Part 2 of a 3 Part Series)

In the first part of this series on Year End Issues we discussed government compliance related year-end tasks.  Now let’s discuss the same compliance matters as they relate to internal record keeping.  Unlike government compliance tasks where there’s no margin for error (or creativity for that matter), there’s lots of room for initiative and creativity in year-end internal reconciliation process to make it truly your own.  But first, below are the textbook step-by-steps for year-end accounting close:

  • Post entries to the general ledger and total the general ledger accounts.  This will help you arrive at a preliminary ending balance for each account.
  • Prepare a preliminary trial balance.  Add all of the general ledger account ending balances together.
  • Prepare adjusting journal entries and financial statements.
  • Prepare closing entries. Get your general ledger ready for the next accounting period by clearing out the revenue and expense accounts and transferring the net income or loss to owner’s equity.

If your company uses accounting software such as QuickBooks or Peachtree, data transfer between the ledgers, the income statement and balance sheet will be seamless.  So in practice, what do the above steps entail for small businesses?

  • At a minimum, a business that is a going concern will have to close out its books once a year since that is required to file your taxes.
  • Depending on the size of the business and amount of transactions, you may be able to manage with quarterly reconciliations.
  • Ideally, you’d want to close your books once a month, and this entails:
    • Collect all necessary documents – bank and credit card statements, payroll reports, cash receipts, invoices and bills, etc…
    • Add all sales receipts, either paid via checks or direct deposit.
    • Deduct all expenses paid via checks, credit cards, direct debit and cash.
    • Determine and record Net Income.

For smaller companies, often the CEO or the office managers wear the bookkeeper’s hat.  Whatever the case may be, make sure you have a good tax accountant to review everything at the end of the year to make the financials make sense for filing.

 

Year End Reconciliation for SMBs – A Three Part Series

Part 1 – Federal and State Compliance

Part 2 – Accounting and Close

Part 3 – Forecast and Budget

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About Richard Lee
Experienced finance and operations professional. Currently partner in five companies, adjunct professor of economics at Columbia College and executive contributor to a small business blog (www.SMBmatters.com); following corporate finance, M&A and management consulting tenures with Orbitz and Diamond Technology Partners; and six years of service with the United States Army.

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