A Step-by-Step Year-End Accounting Checklist for Small Businesses

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The Ultimate Year-End Accounting Checklist for Small Businesses

Year-end is always a busy time for small business owners.

There’s a long and tedious list of accounting health checks, financial statements, tax returns filings, employee fringe benefits, and several financial management reports to review and recalibrate your financial plan for the next year.

Below, we’ve compiled a year-end accounting checklist to simplify the process and guide you through the essential steps to close out the fiscal year on a strong note.

Let’s get started!

Gather All Financial Records

Before diving into year-end tasks, it’s important to collect all the necessary financial documents.

Income statements, balance sheets, and cash flow statements
Bank and credit card statements
Invoices, receipts, and other transaction records

For example, if you’ve used different payment platforms throughout the year, consolidate the statements from each platform to ensure no income is missed.

Organize Your Documentation

Once you have collected your documents, sort them for easy access. Use an accounting software to consolidate records, categorize transactions, and create digital backups. For instance, label folders by month or by type of expense, such as "Office Supplies" or "Utilities," for streamlined review.

Reconcile Bank Accounts

Reconciling your bank accounts is a fundamental step in the year-end accounting checklist. Cross-check transactions in your financial records with your bank statements to identify discrepancies. For example, if a deposit is missing from your records but appears in your bank statement, investigate to determine its source.

Categorize and Verify Expenses

Categorize your expenses accurately to streamline records and claim eligible tax deductions. For example, classify meals for client meetings separately from personal dining to claim the allowable business deduction. If you record home office costs in a dedicated category, you can calculate the deductible portion for business use within minutes. For example, travel expenses for client meetings should be categorized separately from general office expenses.

Evaluate Your Income Streams

Review your income streams to confirm that all revenue has been recorded accurately. Double-check invoices to identify any missed payments or irregularities that may need follow-up. For example, if a regular client’s payment isn’t reflected, reach out to resolve the issue.

Review Accounts Receivable and Payable

Outstanding invoices can hinder your cash flow as you head into the new year. Monitor your accounts receivable turnover ratio, follow up on overdue payments, and consider writing off uncollectible debts if necessary. For example, if an invoice has been outstanding for six months, you might send a final reminder before deciding to write it off.

Likewise, settle any outstanding payments to vendors or suppliers. Review your accounts payable for missed discounts or duplicate payments. For instance, if you’ve overlooked an early payment discount on a vendor invoice, address it before the payment deadline.

Count Your Physical Inventory

If your business involves physical products, conducting a year-end inventory count is vital. Compare your physical inventory levels with recorded figures to identify discrepancies caused by losses, damages, or theft. For example, if your system shows 500 units of a product but your count reveals only 480, investigate the cause.

Calculate Your Inventory Value

Choose an appropriate method for valuing your inventory to reflect its flow and impact on financial statements. Use FIFO (First In, First Out) when older inventory is sold first, which is beneficial during periods of rising costs as it results in lower cost of goods sold and higher profits.

Alternatively, apply LIFO (Last In, First Out) if newer inventory is sold first. This will attribute higher costs to goods sold and decrease your taxable income during inflationary periods. No matter which method you choose, align it with your business model and reporting goals.

Verify Payroll Records

Check payroll records for accuracy and compliance with labor laws. Review employee pay data, including bonuses, overtime, and deductions, to address potential errors. Confirm that holiday pay for December is reflected correctly in the records.

If your business employs foreign nationals, verify that all relevant employment contracts or equivalent documentation are prepared and submitted accurately. Cross-check tax withholdings to confirm compliance with local and federal requirements and mitigate the risk of penalties during financial audits.

Account for Year-End Bonuses and Taxable Fringe Benefits

Year-end bonuses and taxable fringe benefits must be accurately documented and recorded in your financial statements. Taxable fringe benefits, like gift cards, meals, or transportation allowances, are considered part of an employee's taxable income and should be reported as such. For example, if you provided gift cards as a holiday bonus, they should be recorded as non-cash compensation but still classified as taxable fringe benefits.

The cost of these bonuses and benefits must be reflected in your profit and loss statement to properly account for expenses. When bonuses are performance-based, review the supporting documentation to confirm the criteria were met and the correct amounts were allocated. Follow tax guidelines for taxable fringe benefits to avoid any compliance issues.

Organize Tax-Deductible Expenses

Collect all receipts and documentation for tax-deductible expenses. For example, if you attended a conference for professional development, the registration fee might qualify as a deductible expense. Categorize these expenses properly to avoid confusion during tax preparation. If you reimbursed employees for business-related costs, retain clear records of the purpose and amounts to support your deductions.

Review Expense Accrual and Estimated Tax Payments

Compare your estimated tax payments with your actual liability to identify any discrepancies. If there’s a significant difference, adjust your future estimates to prevent underpayment penalties. For example, if your income rose unexpectedly, you may need to recalculate your estimated payments. Examine the causes of any variances, like unanticipated profits or missed deductions, and update your payment plan based on these insights.

Prepare for Tax Filing Deadlines

Familiarize yourself with upcoming tax deadlines, including VAT or corporate tax filings. Use accounting software to track due dates and streamline your submissions. Set reminders for key dates to avoid last-minute scrambling. When filing quarterly taxes, review past submissions for consistency and completeness to avoid errors that might delay processing.

Review Financial Statements

Your financial statements give you a bird’s eye view of your business’s health. Carefully review your profit and loss statement, balance sheet, and cash flow statement to identify trends and areas that need improvement. If your profit margin is lower than expected, evaluate your expenses for potential reductions. Use insights from these statements to adjust pricing strategies, optimize inventory management, or reduce operating costs for better profitability.

Check Cash Flow Status

Cash flow is the lifeblood of any business. Analyze your cash flow statement to confirm you have sufficient liquidity to cover upcoming expenses. If you notice seasonal dips, plan for these periods with a cash reserve. Evaluate your accounts receivable and follow up on overdue invoices to improve your cash position.

Set Financial Goals for the New Year

The new year is an opportunity to set financial goals for your business. Focus on revenue growth, expense reduction, and efficient resource allocation. Aim to increase revenue by expanding your product line or entering a new market. When cutting expenses, review vendor contracts to negotiate better terms or switch to more cost-effective suppliers.

Update Your Business Strategies

Incorporate lessons learned from the past year into your strategic planning. Identify areas where you can optimize processes, lower costs, and drive innovation. If a particular service was underperforming, consider whether it’s worth investing further or redirecting resources elsewhere. Revisit your marketing strategies and analyze which campaigns delivered the highest return on investment.

See If There Have Been Any Regulatory Changes

Stay informed about changes in tax laws and business regulations that may affect your operations. Adjust your practices to remain compliant and avoid potential penalties. If new VAT rates were introduced, confirm that your systems reflect the updated rates. Regularly consult trusted industry sources or professional advisors to stay updated on any other regulatory adjustments.

Conduct an Internal Audit

An internal audit is a proactive way to verify the accuracy of your records and identify areas of potential risk. Use this opportunity to strengthen your internal controls and improve financial transparency. Review expense reports to detect unauthorized transactions. Examine your inventory records to verify that stock levels match physical counts.

Implement Tools and Resources to Simplify Accounting

Take advantage of accounting software to automate repetitive tasks and maintain accurate records. Tools like QuickBooks, Odoo, or Xero can streamline your year-end accounting process and improve efficiency. Use features like real-time reporting to monitor financial health and identify issues promptly. Set up automated reminders for recurring tasks to save time and minimize errors.

Hire Professional Accounting Services

Professional accountants can offer valuable expertise during year-end accounting. If the process feels overwhelming or you’re unsure about complex regulations, consider outsourcing these tasks to save time and stay stress-free. An accountant can help identify additional deductions you might have overlooked. They can also provide strategic advice to improve your financial practices and long-term planning.