As businesses forge ahead, accounting often gets left behind. Time passes unnoticed, and before you know it, months or even (gulp) years have gone by without proper bookkeeping updates. Consequently, the impending project looms over you like an ominous thunderstorm, ready to unleash disastrous consequences.
Embarking on bookkeeping cleanup may seem daunting, but fear not. By following a systematic approach and working through the following steps, you can effectively gather the necessary information. Once your bookkeeping is immaculate, your business will be well-equipped for growth, tax season, and investment opportunities.
Peruse this checklist for bookkeeping cleanup to align all your financial matters seamlessly.
1. Gather all of your financial records
Determining the most challenging aspect of this process is difficult, as it varies depending on the nature of your business. However, rounding up all your previous financial records can be particularly time-consuming. This entails gathering bank statements, receipts, invoices, and other relevant financial information.
To initiate the process, begin by sorting through your email, which serves as a convenient storage system for managing electronic purchases. You can employ filters based on dates or keywords to facilitate your search. Download, print, or take screenshots of all receipts and store them physically or electronically, such as on Google Drive.
Next, reach out to any vendors or clients with whom you conducted business during the past year. If you lack records of your transactions, they may possess the necessary information. Request a printout or list of each transaction or invoice between you and them.
Now, examine your bank and credit card statements. Take note of any transactions for which you lack records and be prepared to track down the corresponding information, if necessary. Additionally, review all transactions made through third-party payment processors.
Access your accounting software and evaluate any potential gaps in the data. Ensure that your bank feeds are connected and identify any missing transactions or records that require updating.
Finally, if you possess any physical records, meticulously organize them. These records may prove useful in uncovering any missing information from your electronic transactions.
What steps should be taken when the records of purchase or invoice cannot be found?
If you're unable to locate any records of a transaction that you are certain took place, or if you're missing an invoice, you can consider the following options: reach out to your vendor or supplier for assistance, reconstruct the invoice using the information or records you do have, or make use of estimates based on historical data.
With all the necessary components in hand, you are now ready to proceed to the subsequent stage of the bookkeeping cleanup checklist, which involves categorization.
2. Classify transactions
Maintaining consistency in categorizing your transactions is essential. Your chart of accounts serves as a comprehensive list of categories or accounts used to classify each transaction. As a small business, it's advisable to avoid an excessive number of accounts, ideally limiting them to 10-15. Fortunately, many bookkeeping software options provide an excellent starting point for your chart of accounts.
It is important to group similar transactions under the same account while ensuring clarity regarding the purpose of each transaction. Instead of simply labeling something as "supplies," consider being more specific, such as "production supplies" or "marketing supplies."
This step holds significant importance in obtaining accurate information for your financial reports and has a direct impact on your tax obligations. Take the time to review past transactions, ensuring their correct categorization, and update any that remain uncategorized.
Depending on the capabilities of your bookkeeping software, you may have the option to automatically categorize transactions as they occur. This feature can greatly assist in keeping your accurate bookkeeping up to date.
3. Reconcile bank statements
To effectively clean up your bookkeeping records, the next crucial task on your checklist is to reconcile your bank statements. Begin by thoroughly examining your bank statements within the specific timeframe you are currently addressing. Verify whether each transaction is accurately recorded in your accounting software. Take note of any inconsistencies or discrepancies, such as missing checks or deposits.
To ensure a successful reconciliation of your bank statement, you might need to manually input transactions that are absent from your accounting software. By doing so, you can ensure that the balance in your bank account aligns with the balance reflected in your accounting system.
To maintain consistent and accurate records, it is highly recommended to perform monthly reconciliations. These regular check-ins will help identify any discrepancies or missing transactions. Therefore, even after you've caught up with your bookkeeping, make it a habit to reconcile your bank statements on a monthly basis.
Related Topic: Xero vs. QuickBooks: A Comprehensive Comparison for Small Businesses in the NY
4. Adjust Entries
Coming up next on the list for tidying up your bookkeeping: making adjustments to entries. There might be situations where you have to manually modify entries to properly include accruals, depreciation, or amortization. (This would be an opportune moment to seek assistance from professionals!)
Adjusting entries refer to accounting entries that are created at the end of an accounting period to bring account balances up to date and ensure the accuracy of financial statements. Adjusting entries are crucial because certain transactions may not have been recorded in the period, they took place or may have been recorded incorrectly.
Here are some typical scenarios in which your small business might require adjusting entries:
- Accruals: Expenses that have been incurred but not yet paid or recorded.
- Examples: wages or salaries owed to employees, interest on loans, rent owed on a lease.
- Depreciation: Adjust entries to accurately record the value of assets on the balance sheet.
- Examples of depreciable assets: are computers, printers, vehicles, furniture, and machinery.
- Amortization: Allocating the cost of intangible assets over their useful life.
- Examples of intangible assets: patents, copyrights, trademarks.
- Prepayment: Expenses paid in advance but not yet incurred.
- Example: paying for insurance coverage for the entire year in advance.
- Accrued revenue: Revenue earned but not yet received.
- Example: providing services to a client in one period but receiving payment in the next period. Adjusting entries may be necessary to reflect the earned revenue in the current accounting period.
Adjusting entries may involve technicalities that can exceed the scope of what most small business owners are expected to handle. During your bookkeeping cleanup, it is advisable to seek assistance from a professional to guarantee adherence to generally accepted accounting principles (GAAP) and ensure the accurate execution of adjusting entries.
5. Submit your tax returns
While progressing through your bookkeeping cleanup checklist, it is crucial to prioritize staying current with your tax obligations. Whether you have requested an extension or it is time to commence regular quarterly tax payments, the newly organized bookkeeping records will facilitate timely and consistent payments. Adhering to quarterly tax payments can prevent unnecessary penalties or surprise expenses when your annual taxes are due. To fulfill your tax obligations, you have the option to make self-payments via the IRS website or consult your accountant for assistance in determining the appropriate quarterly tax amount.
6. Find a new system
If you find yourself delving into a long-overdue bookkeeping cleanup that spans over 12 months, it is essential to establish new systems to prevent encountering the same situation in the future. Every business has unique requirements, but it is crucial to seek assistance in the areas where you face the most challenges. Locate an accounting software or tool that enables you to:
- Streamline payment processing and bank feed integration effortlessly
- Efficiently generate invoices and effortlessly collect payments
- Digitally store receipts for easy retrieval and organization
- Generate fundamental financial reports such as balance sheets, income statements, and cash flow statements to gain insights into your business's financial well-being.
Consistency will be your most powerful asset. Therefore, make a note on your calendar, set an alarm, or find a reliable accountability partner to join you in regularly dedicating time to managing your finances. To stay on course, you can refer to this bookkeeping cleanup checklist. The great thing is that the more consistently you engage in these activities, the less time they will consume. If you realize that you lack the time, energy, or expertise to handle this task independently, it's a clear indication that it's time to delegate your bookkeeping responsibilities to an external source.
Get Caught Up Now
If you make a few errors in your bookkeeping, it may not appear significant at first. However, as these mistakes accumulate, they can quickly escalate and become unmanageable. Our team of skilled bookkeepers is here to rectify your bookkeeping issues and ensure that your financial records remain organized and error-free, allowing you to focus on running your business smoothly. Benefit from our tailored accounting support that caters specifically to your business requirements. Contact us today to schedule a complimentary bookkeeping consultation.
