My earlier blogs on this subject covered steps to be taken prior to year-end. With those tasks completed, it’s time to dive into the real year-end closing work. Namely, account reconciliations.
Reconciling an account is an accounting process used to make sure that the transactions in a company’s financial records are consistent with account statements or other third-party reports. While most accounting programs focus on bank and credit card account reconciliations, technically, you should reconcile all asset, liability, and equity accounts.
That said, some accounts are more prone to being out of balance. I’ve discussed reconciling Accounts Receivable, Accounts Payable, and Inventory accounts previously, so let’s focus on the following accounts and some of the common errors that impact them:
Petty Cash/Cash on Hand
Make this year the last year that you waste time reconciling this account. Consider inactivating this account and switching to better alternatives like, Venmo, (prepaid) company credit cards, or simply reimbursing employees for purchases made.
If not reconciled monthly, this can be a time-consuming task, even with bank feed integrations. When companies have multiple bank accounts, the error I see most frequently is a transaction booked to the incorrect account.
It is not uncommon to find that prepaid account balances are overstated at year end. Failure to properly book recurring entries is the primary reason. Once reconciled, be sure to book recurring (credit) entries for any remaining balances.
Fixed Assets/Accumulated Depreciation
I frequently work with businesses that have capitalized assets with nominal book values. These firms have no asset capitalization policy or De Minimus Safe Harbor election in place. Set a minimum capitalization figure ($2,500, for instance) and update your fixed asset balances and depreciation schedules accordingly, expensing items as needed.
Many small businesses fail to properly book accrued interest and accrued payroll at year end. Interest accruals, often associated with investor loan agreements not shared with bookkeepers, are missed. Unmet (between payrolls) employee compensation as of year-end, is simply left to be captured in the first January payroll.
Shareholder loans are often made in haste to offset cash shortfalls. It is not uncommon that these “temporary advances” are undocumented. At year end, these loans should be documented with appropriate interest expenses booked, typically using the Applicable Federal Rate (AFR) for the applicable loan date and term.
During CPA compilations/reviews, companies can be surprised to learn that they must establish the fair market value (FMV) for any stock option grants. They are required to complete a 409A valuation to determine the value of their common stock. A year end catch-up on this task is often a surprising, but necessary, year-end closing task.
Real year end closing, however, involves more than just reconciling accounts. Look for my next blog, which deals with some final, yearly clean-up tasks.