Year End Accounting Procedures

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Although these are listed as Year-End Procedures, many of these items should occur each month as part of the monthly closing process.


Balance Sheet

Reconciliations

These are important to the organization for it provides a verification that the balances shown on the entity’s books are in accordance with the balances shown on a third party’s records.

Checking, savings, and credit card accounts should be reconciled with statements provided by the financial institution. Cash reconciliation reports will include the balance shown by the bank minus checks outstanding that have not cleared plus adding deposits in transit or funds that have been received and recorded in the general ledger but not taken or arrived at the bank yet. The resultant balance should tie to that shown on the company’s books in the check register. Of special interest are any deposits that have been recorded in the company’s books but have not cleared the bank. Normally, deposits are hand delivered to the bank or are mailed and should arrive within just a few days. Any deposits that are shown to be in transit that are more than a few days old should be thoroughly investigated to attest to their validity. Correspondingly, any checks with a date more than 30 days old should be investigated to see if they have been lost or if the payee is an actual vendor. Depending on company policy, checks with dates older than 30 or 60 days should be voided and payment stopped if appropriate. Checks written but not cleared need to be dealt with at year end in accordance with State Escheat Laws or laws spelling out what is done with abandoned property. Credit card statements should be reconciled to the balance shown on the entity’s books to insure that all expenses are properly recorded.

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Receivables

Review receivable aging report for accuracy and see that all worthless receivables are written off based upon the entity’s policy regarding bad debts. Writing the debt off does not mean that collection attempts should be stopped. If written off amounts are collected sometime in the future, the collected amount will be recorded as income at that time. Verify that any negative receivable balances are correct and determine if checks should be written to clear the credit or will it be applied in the coming months.

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Inventories

This is an extremely important function that definitely should be done at year end and quite a bit more often depending on the dollar amount of inventory on hand and the turnover of the inventory. An inventory adjustment can have dramatic impact on the profit or loss of the entity. Inventory can be done on a FIFO (First in First Out) or LIFO (Last in First Out) basis. You should determine that the costing method conforms to the inventory method stated in the company’s tax return.

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Fixed Assets

Review additions/subtractions to fixed assets for accuracy and if assets in this category conform to the company’s capitalization policy. For example a company may elect to expense assets in certain categories in amount less than $250. These policies should conform to IRS guidelines for asset categories.  Have purchase and sale documents available for tax preparation purposes.

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Prepaid Assets

This is an area that should be closely analyzed for it is an area where mistakes can occur that can distort the Profit and Loss of the entity. Examples of prepaid items are insurance policies paid a year in advance as well service contracts that are funded in advance of being used.

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Other Assets

Security deposits are an example of items in this category and the balances on the company’s books should be confirmed with the entity holding the deposit.

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Notes Receivable

Similar to accounts receivable, notes receivable should be reviewed in accordance with the source documents and reconcile year-end balance with the amortization schedule and insure that payments have been made in accordance with the payment schedule.

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Accounts Payable

An accounts payable report should be prepared and determine the accuracy by comparing invoices outstanding versus the report. Any invoices that have been forgiven should be written off.  Verify any negative balances can actually be applied to future purchases or can the credit amount be refunded to the company by the vendor.

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Other Liabilities

These are typically items like accrued liabilities like sales, payroll, and real estate taxes. The amounts should be verified with year-end reports like sales tax due reports and payroll liability reports.

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Notes Payable

The amounts on the general ledger should be verified with the balances shown by the note holder such as a bank or other lending institution. The amount of principal and interest payments should agree with the amortization schedule.

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Retained Earnings

This is basically an accumulation account and nothing is generally posted to this account but is where the current year’s income or loss is accumulated when the books are closed for the year.  The beginning Retained Earning balance should be verified that it ties to the Retained Earnings balance from the prior year.

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Capital Stock/Partner Capital

Any changes of ownership in the entity should be noted and insure that they conform to the corporate or partnership records where ownership changes would normally be recognized.

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Distributions/Draws

Review these accounts and determine if amounts withdrawn exceed available capital accounts and if so, should be converted to loan amounts from the owners. It this situation occurs, it might be best to confer with whoever is doing the entities tax return to make sure they are in agreement.

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Opening Balance Equity

This account is where QuickBooks posts any out of balance entries. This account should always have a zero balance and if there is an amount in this account, it should be researched to see the source of the entry and adjust accordingly.

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Shareholder/Partner Loans

As indicated in the distribution/draw section, loans to partners or shareholders should be documented and made in accordance with the tax return preparer.

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Income Statement

Income

Best to review all the transactions in the general ledger to confirm that the source of the income is from invoices and/or cash sales. Errors here are typically where loan proceeds are mistakenly coded as income. Other mistakes can come from sale of fixed assets which have to be entered differently.

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Cost of Goods Sold

As was pointed out in the inventory section, this is an area that needs to be confirmed based upon a physical inventory at year end or even more frequently.  Review the transactions to ensure that all transactions are proper types of entries.

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Charitable Contributions

Mistakes to be on the lookout for are ads purchased in non-profit publications that should be advertising expense rather than contributions. Political contributions and not deductible and it is best to insure that an organization that received funds are actually recognized by the IRS as a 501C3.

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Gifts, Awards, Bonuses

Gifts to employee or customers are limited to $25/year, per individual.  Items, cash or gift certificates in excess of $25 are to be treated as wages and must be reported through payroll as (W2) wages. Ski passes purchased and given to employees are an example of an item that has to be reported as wages.

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Interest Expense

Similar to notes payable in the balance sheet section, the amount of interest should be reconciled to the lender’s statement and/or amortization schedule for notes.

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Meals and Entertainment

These should be classified properly depending on the reason for the expense. Expenses for events for employee functions such as Holiday parties can be 100% deductible while meals provided clients are deductible at 50%. These expenses should be reviewed to see if they are classified properly.   Receipts should be maintained and the purpose of the meal should be noted including who attended, why the meeting occurred, and when the meeting occurred.

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Miscellaneous Expense

This should be reviewed to insure that expenditures are in the correct account and that no large expenditures are posted here which should actually be in their own account.

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Repairs and Maintenance

This account should be reviewed to determine if any capital expenditure items have been coded to this account by mistake. Amounts that are to be capitalized should be in accordance with the entity’s capitalization policy and guidelines established by the IRS for types of assets.

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Officer’s Salaries

These amounts need to be in a separate category from normal salaries and wages for these amounts need to be listed as individual line items for the preparation of the tax return for S corporations. The amount should be tied to the wages reported on the W2s for the officers. The amounts should be reasonable based upon the work performed by the officers.

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Salaries & Wages

These are the amounts paid to employees and the totals should tie to the totals of the W2s.

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Payroll Tax Expense

These are taxes paid by the employer as employer expenses. They typically will include Medicare, Social Security, State Unemployment, and Federal Unemployment taxes. In some communities there are local employment taxes that are paid by the employer. The amount of taxes in the accounting records should tie to the reports filed with the tax authorities such as 941s, W3, and Unemployment returns.

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Travel

Receipts should be maintained and travel expenses should be for trips related to the business of the entity.

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Vehicle Expense

Reimbursing an employee for business use of their personal auto is an allowable expense as long as the reimbursement amount per mile does not exceed the IRS rate for mileage calculations.   Expenses for company owned business vehicles should be recorded in a mileage log. Commuting to and from work in a company owned vehicle is income to the employee using the vehicle and should be reported on the W2.

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1099 Reporting

Review vendor payments to insure all forms are prepared timely prior to end of January.  W9's should be kept on file for each vendor prior to release of funds easing the burden at year end.

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