Staying (Financially) Fit Over the Holidays
With Halloween only 12 days away, we are officially in the holiday season. This is my favorite time of year, and I understand the temptation to let work slide as I give into the distraction of Thanksgiving, Christmas, and vacation.
But holiday season coincides with year-end and, for businesses, this needs to be a time of focus. Just as it's easy to undo months of dedicated diet and exercise with the wild abandon of the holidays, it's easy to let your business financials slip at the time when you really need them at their peak.
Here are a few common bookkeeping issues we see in Q4 year after year, and how to avoid them.
Missing Deductible Expenses
The holidays are a great time to let loose and be more sociable with co-workers, clients, and referral partners. But just as you lose count of how many calories you're taking in, you can lose track of the money you're spending. Not only can this result in overspending, of course, but you can also be missing out on deductible expenses that will save you money in just a few months at tax time.
Perhaps you're planning an office Christmas party for your staff. Not only would those expenses be deductible, even food purchased for a potluck, but any staff appreciation gifts you'd like to hand out, as well. The same goes for client or vendor appreciation gifts. (If you have someone external doing your books, be sure they're asking about purchases for things like massage gift cards and fruit baskets, and recording them as business expenses, not draw activity.)
Many networking groups hold a special holiday party. Not only would any food and drink you purchase for that be deductible, but also mileage to the event. If you're having trouble keeping up with your mileage, something as simple as a mileage log (free to download here) in your vehicle or as sophisticated as an app can do wonders to help you track that.
Whatever you do, be sure you're keeping proper record of your business expenses, even while you party it up.
Falling Behind on Bookkeeping
Between parties, travel, and employees being out sick from all the germs they picked up partying and travelling, it's easy for certain tasks to get a bit behind in the later part of the year. However, bookkeeping is not like cleaning the house; you can't just plan to catch it all up at once. If I don't clean my house for a month, it's not that much more difficult, proportionately, than if it's not cleaned for a week. Bookkeeping doesn't work that way. If your bookkeeping takes four hours a month and you fall three months' behind, you now have twelve hours worth of bookkeeping to do. (And finding twelve hours for a task you like is difficult enough; imagine trying to find half an entire day to dedicate to a task you dislike.)
Many business owners who find themselves in the position of staring down months of untouched financials make the decision to get some outside help, just to catch things up. The problem is that they're in good company. Beginning in November, professional bookkeepers get very busy with new clients who are hoping to get their books cleaned up for year-end. Not only is there an influx of new clients, but existing clients continue to need service, and we're busy getting all of their year-end documents ready as well. Many of my friends who work solo or operate smaller firms do not take on any new work during this time of the year.
If you aren't certain that you'll be able to keep up with your financials on your own during the holiday season, begin seeking assistance now, before you get too busy.
Not Preparing for Next Year
(NOTE: If you are one of those people who files an extension out of habit, this is for you.)
You may not realize it, but there is a lot you can be doing right now to get ready for next year's tax season.
Just like you don't have to wait to make a New Year's resolution to start getting fit, you don't have to wait for January 1st to start getting your books in shape for tax season. For starters, you can be preparing for the January payroll reporting rush. In the chaos of year-end, many business owners forget that 1099s and W-2s are due at the end of January, and not in April. To prepare, you can be sure that you have W-9s, W-4s, and any required state tax documents on hand now, instead of trying to get them from workers later. (This is especially true of 1099 contractors, as they may work for you for a much shorter season and can be harder to track down later.)
If you have been using an outsourced payroll system, be checking now to ensure that the payroll reports in your financials match those provided by the vendor. Sometimes errors do occur, and you will need to alert the payroll company right away if their totals are incorrect. (Like bookkeepers, they are getting very busy this time of year, too.)
You want to check to make sure that your sub-ledger totals, such as your Accounts Receivable and Accounts Payable, match your General Ledger balances. You also want to be sure that you are up-to-date on any reconciliations.
Finally, it's a good idea to take some additional tax-sheltering steps. For example, if you had a good year and are cash-basis, consider making a large business purchase in December instead of January, to reduce your taxable income. Or maybe you have not been paying enough into your withholdings or your quarterly estimated self-employment taxes, and need to increase those in December. There are many options available to you, but you need to act now.
Fortunately, you still have some time to make the most of your holiday season. Stay on top of your books as you go, and you will have a restful and relaxing January (at least compared to everyone who didn't put in the work during December). If you need help, we are always available.
Ledger Nightmares: Entries only an accountant should make
One of my favorite holiday traditions is watching "The Nightmare Before Christmas". For those of you unfamiliar with the movie, here is the basic plot synopsis: The leader of Halloween Town takes an accidental visit to the land of Christmas and is so enchanted by all of it that he decides to give Santa the "year off" and take over in his place. The residents of Halloween Town are, needless to say, ill-suited for this task, and the results are hilarious and horrifying.
The problem is, they see just enough of Christmas to think they know how to emulate it, but they misunderstand the core concepts.
This is a frequent issue when non-accountants take on bookkeeping duties. Recording sales and expenses is one thing, but there are certain entries which really should be left to the professionals.
This week we're looking at the most frequently-confused accounting principles and discussing why it is better to not attempt these yourself.
Setting Up Chart of Accounts & Opening Balances
Though you would think bookkeeping would be simple with a clean slate, getting your company started can be one of the most complicated times, accounting-wise. (Okay, everything about starting a company is complicated.) There are legal and professional expenses, you must determine book value of any assets which you already have, and entering equity amounts can be difficult. (In particular, how you record money the owner contribues, whether as paid-in capital or a loan from the owner, can affect tax liability.)
When these issues are compounded by extra demands on the owner's time and focus (not to mention the learning curve associated with self-training on accounting software), you have a recipe for inaccuracies.
While you are setting up your business, get someone with experience to jump-start the accounting side of it.
Capital Expenditures
Expanding your business is an exciting time, particularly when you're investing in new locations. Whenever you are spending funds or assuming liability to obtain a physical asset which will be used for productive purposes for at least one year, that is a capital expenditure. Capital expenditures can be land, buildings, machinery, or even software upgrades (generally provided they meet a certain cost threshold).
For an amateur bookkeeper, capital expenditures might appear deceptively easy. Buying some land for a new plant site? Debit Land, credit Notes Payable, and expense whatever incidentals come up along the way, right?
Of course not! If it was that easy, everyone would do their own books.
If you record a capital expenditure like that, your book value will be off and when you calculate depreciation it will be inaccurate. (We'll get to depreciation and other contra-accounts later.)
Rather, when capital expenditures are recorded, you are also to include in the book value the net cost of getting the property ready for use. If the ground needed to be levelled, that cost would be included. Likewise, if there were salvageable materials present which were then sold, that gain would be used to reduce the book value. Certain legal and professional fees surrounding the sale may be included as well. It's all very interesting (but also very complicated for a layperson).
Referring to our example, what about that Note Payable? Assuming it's accruing interest, at year-end you'll need to make...
Adjusting Entries
Month-end and year-end adjusting entries are both necessary and a pain in the neck. There are several types of adjusting entries, such as adjustments for goods or services clients prepaid you for (Unearned Revenue), expensing those things for which you prepaid, recording accrued interest, etc.
One of the biggest dangers at year-end is recording adjustments to inventory. Even with consistent inventory tracking throughout the year, there are generally still adjustments to be made at year-end. Mistakes in inventory recording can result in over or understated COGS (Cost of Goods Sold) and inaccurate tax liability calculations. For reasons such as this, it's usually a good idea to have an accountant look at your year-end statements before preparing taxes. (Remember that many CPAs will simply prepare your taxes based on the statements you give them. For that reason, be sure you are hiring someone who will actually look for issues in the accounts themselves.)
Even if it's not a special occassion, such as making a major purchase or at year-end, there are still transactions that require bookkeeping assistance. Notably, any of those involving...
Contra Accounts
A contra account is one which is intended to have an opposite normal balance for that account classification. For instance, a sales discount is a contra revenue account, so it has a normal debit balance (whereas most revenue accounts have a normal credit balance).
Contra account entries have the potential to be very tricky, and the greatest offender for this is depreciation. Recording depreciation is essential for accurately estimating the current value of assets, but calculating it is a complicated process. First, life expectancy of the asset and salvage value must be computed. After that, straight-line depreciation is the simplest, but nowhere near as accurate as usage-based or the double-declining balance method. Finally, when the asset is finally sold or scrapped, the gain or loss must be calculated and recorded based on the present value. Of course, any errors can then negatively affect tax liability.
Long story short, any time you feel like you're getting in over your head, ask a professional. Trying to D-I-Y complicated accounting entries can turn your General Ledger into a horror story.