CLOSING YOUR 2023 BOOKS: THE RIGHT WAY
Hey, hey, hey! Okay, so it’s January 17th, but it feels more like January 74th with all the 1099 prep we’re currently doing (Need help on that? Check out our blog from December!) And now it’s time to talk about another thrilling subject: closing your 2023 books. Okay, so maybe it’s not as exciting as that upcoming ski trip you have planned, but it is a necessary topic none the less. Closing your books, the right way, can mean the difference between a smooth tax season and a frantic scramble on the eve of March 15th… or September 15th… if you are the procrastinating type. So, let’s dig into why it’s crucial and how doing it right can save you more than just a huge migraine! Bonus, read all the way to the end for a special giveaway!
Reconciling to Last Year’s Tax Return: Hindsight is 20/20
If you thought 2022 was under the bridge, not so fast. It’s critical to make sure that your balance sheet, as of 12/31/2022 in your accounting software, matches what’s in the tax return your accountant filed. If it doesn’t match, don’t go down the rabbit hole of why – what’s done is done, just figure out which accounts don’t match and make an adjustment to make them right. If you have any assets that are not fully depreciated, this will probably include some depreciation expense. After you make those adjustments, make sure to reverse it as of 1/1/23. If this sounds a bit scary, we get it. Don’t be afraid to invoke the help of a trusted accounting partner (like us💁♀️) or your tax professional!
The Loan Lowdown: Interest
Let’s say you took out a loan or mortgage and, like a responsible adult, have been making payments. But have you been recording the interest that was a part of those payments? If not, you’re missing out on interest expense that could lower your tax liability. It’s like finding money in that winter coat you just whipped out of storage, except it’s in your financial statements.
It’s An Accrual World: Unpaid Invoices
Do you file on an accrual basis? (If you have inventory, the answer is likely yes.) If so, let’s talk about any unpaid invoices. When you create an invoice, whether it’s paid or not, it counts as income. So, if you’re still feeling optimistic that your client is going to pay that open invoice from 2019… think again. Closing any unpaid invoices that are more “wishful thinking” than “incoming cash” can reduce your taxable income. But before you get “delete” happy – don’t just simply delete the invoice, go through the proper methods and close it out to a bad debt expense account, otherwise you could end up with a big mess on your hands!
Adventures in Inventory: The Art of the Adjustment
Managing your inventory can be trickier than managing your four kid’s soccer schedules. So, to refresh you on that accounting 101 course you took in college, the expense of inventory is not reflected on your P&L until you actually sell the inventory. So, if you’re still sitting on 1,000 of those choker necklaces that made a brief come back in 2017, it’s time to give it up and write ‘em off, they ain’t gonna sell. And by coming to terms with the fact that your inventory is not the goldmine you once thought, you can lower your tax liability and some of those precious, hard-earned dollars that you were going to have to pay to the IRS.
Your Bank Reconciliations: Cue the Detective
Filtering through your bank account reconciliations may be a task more suited for the Sherlock Homes of bookkeeping – instead of solving crimes, he’s sleuthing thousands of transactions. But seeing as Sherlock is probably otherwise occupied, here is what you need to look out for: uncleared transactions. These are the ones that didn’t get reconciled. Why are they there you ask? They may be sneaky duplicates of ones that were reconciled, or they could just be checks chillin’ on your vendor’s desks waiting to be deposited. Either way, it’s important to ensure these are all legitimate, in other words, get rid of any duplicates.
The Grand Finale: Best Practices for Year End Close
- Review All Accounts: Ensure everything is up to date, reconciled (nothing uncleared that’s not legit), and accurate. It’s the final exam… for your business – let’s not cram like we did in college.
- Double-Check Payroll: Make sure all payroll transactions are recorded correctly – this means your payroll wage expense accounts match what’s reported on your payroll provider’s annual 940 and your payroll liability accounts on that balance sheet thing reconcile to $0. Get this right ‘cuz nobody wants to mess with payroll.
- Document Everything: Keep records of all your financial moves. Think of the IRS like Santa, cause they’re checking this list twice.
- Consult the Pros: If you don’t feel all warm and fuzzy about your financials, it may be time to call in the cavalry. Working with an accountant or bookkeeper (like us!) before you hand your finances off to the tax pros could be a game changer. We don’t call ourselves Accounting Therapy for nothin’ – we double as financial therapists when you need us the most! 😊
Closing your books may sound simple and like “totally not a big deal” but it’s pretty essential and can take some crafting to get it right and maximize your tax savings. By following these best practices and keeping an eye out for the sneaky things like uncleared transactions and loan interest, you can rest assured you’re going to be ready when the tax deadlines come-a-knocking! And if the thought of tackling this alone is as appealing as writing your check to the IRS, just remember we’re here for you! We offer a range of services to help & they all include our signature Accounting Therapy with a healthy side of humor!
Oh & we almost forgot – The Special Giveaway! We’re sharing our team’s tried and true year end checklist to help keep you organized & efficient if you’re brave enough to tackle year-end close on your end!