The Year-End Accounting Missteps of Rookie Entrepreneurs
Free Book Preview Tax and Legal Playbook
It’s nearing the end of the calendar year, and, for most companies, that means the end of the fiscal year as well. With that comes a flurry of accounting tasks that need to get done before the calendar flips to 2013. Some are obvious, but others are less known -- especially to the first time entrepreneur.
Of course, every business is different, so for specific accounting advice you should contact your accountant. But absent that, here a few end-of-year accounting to-dos we’ve seen slip by rookie entrepreneurs:
Reconcile your accounts.
Of all year-end accounting tasks, reconciliation is perhaps the most important. You absolutely must reconcile your "Aged Accounts Payable" balance to "Accounts Payable" balance and your "Aged Accounts Receivable" balance to "Accounts Receivable" balance on the balance sheet.
Your bank balance needs to be reconciled to your books too. Why do all this? These tasks are necessary to ensure that transactions have been recorded correctly. Reconciliations should be done before year-end and then rolled forward to include year-end. Again, discuss reconciliations with your accountant.
Organize your contractors.
Lots of small businesses start out as one- or two-person enterprises, with the support of contractors. Business owners who hire independent contractors and pay them more than $600 during the year are required by law to send them (and the government) a form 1099 by January 31 of the following year.
So you might as well get started collecting the required information from your contractors now: legal name, address, social security or employer identification number, etc. And while you’re at it, make sure you can easily determine how much was paid to them for the services they performed.
Collect on outstanding bills.
Outstanding invoices that carry over into a new fiscal year are a hassle. For clients or customers that are behind, now is the time to turn up the heat.
If they’ve been dragging their feet for some time, there are a few "motivators" you can try. If they're local, you could be "in the neighborhood and happy to stop by." Or try communicating the fact that your controller has been all over you to get this taken care of.
Then, if attempts to collect turn out to be futile, first, do no more work for this client. Second, you may be able to write off the bad debt and get a tax deduction. Ultimately, you'll want to do everything in your power to get paid before the close of the year.
If you sell products that have a warranty, you should have a "Reserve" account to cover potential future claims based on historical rates of expenses. Year-end is a good time to assess this. Similarly, if you have accounts receivable that may not be collectible, you might consider setting up a "Reserve for Doubtful" accounts to recognize the potential liability of the asset on your books.
So while it’s important to rest, recharge and spend some time with friends and family, year-end accounting tasks wait for no one.
What's been the hardest year-end accounting nut for you to crack? Let us know in the comments below.