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Every year you close the books.  But are you capturing all of the correct information?  Wouldn’t it be better to have a reliable set of books throughout the year and at year end, and not months after the fact when your accountant sends the information back to you after they’ve prepared the taxes? Try something new. This year, before you begin, make an assessment of who will be reading your financial statements and why.

Considerations are as follows:

·         Owners – To assess business performance and identify strategic steps that need to be taken.

·         Management – your/their needs are twofold.  First they need involvement in reviewing the items that are under their control.  The manager needs to do a look-back and evaluate the accuracy of what is recorded, and identify potential errors. In the analysis, key questions to consider are what, when and most importantly, why.

·         Lenders -need to know if they will be repaid. This will depend on the solvency of the company, which should be revealed by the Balance Sheet. Long-term loans may also be backed by 'security' given by the business over specific assets. The value of these assets will be indicated in the Balance Sheet based on historical cost as depreciated.  Another key issue is loan covenants.

·         Government agencies- The tax authorities use financial statements as a basis for assessing the amount of tax payable by a business.

·         Others – Customers, suppliers, and others may need financial statements in securing standard business contracts.

Most users desire only one thing.  Accurate financial reporting.  We will consider the users’ needs and ratios in developing the Dashboard Key Indicators later in the article.

So first, we will address a few year-end close items and Best Practices.  (Okay… Share these with your controller.)

·         Equity:  First of all, check retained earnings and equity for agreement with last year’s tax return. If there are errors, you might have posted something after last year’s close.  Investigate and correct.  If significant, discuss with the owner and your tax advisor.  An amended return might be necessary, but most often that is not the case.  You can run the amounts through the current year. To ensure this does not occur in the future, go to Edit: Preferences, and set a year end password.

THE MOST BASIC ACCOUNTING RULE TO REMEMBER IS THAT “IF THE BALANCE SHEET IS CORRECT, THE P&L FALLS OUT.”  What that means is that you start with the balance sheet analysis and when all balance sheet items are covered, the bottom line is correct.  Items may not be in their appropriate buckets, but your income or loss is correct.

Chart of accounts:

o   Many companies have a chart of accounts that not even General Motors would consider.  Review the chart of accounts for inactive, old and duplicate accounts.  Consolidate or merge wherever possible.  This eliminates guessing games in coding the accounts and more consistent reporting.


·         Banking:

o   Make sure all bank accounts are reconciled.

o   For those outstanding items, review for reasonableness.  Old outstanding checks may indicate replacement checks were issued and the original check not voided.  Be careful about voiding.  If it was an accounts payable check, voiding it will reinstate the payable.

o   Old deposits not cleared require special attention.  You should look into the cause.

·         Accounts Receivable:

o   Review the listing for unusual items including aged receivables.  Do you have special collection procedures?  After identifying any errors and correcting them, you need to either reserve them or write them off.  You only get a tax deduction when you write them off.

o   There are Customizable Reports in QB Enterprise to assist management in analyzing the business.

·         Inventory:

o   Physical Count (Cycle Counts)

o   Check units of measure

o   GL agrees to inventory listing

o   Is there inventory in transit?  Title passes on purchase but not yet received?

o   Lower of cost or market.  This is much more than financial reporting, it’s a matter of business effectiveness.  Remember, you are not a museum.  You should not hold inventory for longer than a year, preferably much less.  Remember Average Cost or FIFO
(First in – First Out) not FISH, First In Still Here.

o   Customizable Reports in QB Enterprise

·         Prepaid expenses and other current assets:

o   Many insurance packages require deposits and formal payment terms.  Consider setting up the full insurance amount as prepaid with memorized write-offs monthly, then set up the corresponding liability in accrued expenses and code the payments against this account.

·         Total Current Assets are those that can be converted to cash within one operating cycle, generally one year.

·         Fixed Assets:

o   For long-lived assets it is a “best practice” to keep copies of purchase documentation in either a book, or if you are using QB, attach the document to the record in fixed assets. If you have ever been through a sales tax audit, you will recognize the need for this step.

o   Keep in mind capitalization rules.  Do not capitalize small items. [1]

o   Make sure assets no longer in use or sold are removed from the listing. This step in necessary in reporting tangible assets for state tax reporting.

o   Make sure you have set up items for fixed assets.  This will ease time consuming tasks of managing fixed assets.  Additional information included in a fixed asset item are identifiers, i.e. VIN number for vehicles, warranty and more.

o   Use fixed asset manager in QB Enterprise to manage fixed assets and calculate and record depreciation.

·         Other Assets, including Goodwill:

o   For other assets, these are generally long-term in nature.  It is a good idea to keep copies of the support similar to that for fixed assets.

o   Effective for FY 2015 & beyond, an accounting alternative is available whereby for existing and future years, acquired goodwill is written off over 10 years.

Liabilities & Equity

·         Accounts Payable:

o   Vendor lists – review for duplicates and inactive vendors.

o   1099’s - Remain cognizant of the 1099 rules for Non-employee Compensation, attorney compensation and rents.[2]

o   W-9’s

o   Customizable Reports in QB Enterprise

·         Accrued Expenses

o   Accrued interest on debt including shareholder debt

o   QB can also assist you in tracking workers compensation.  The codes and rates are set up under the Employees tab, with the appropriate codes assigned at the employee detail level. You can also run worker’s compensation reports and evaluate the accuracy and validate the amounts payable.

o   Make sure the payroll tax liabilities agree to the reports provided to the governing agencies.

o   Other accruable expenses include payroll, insurance, commissions, etc.

o   Auditors will send a legal representation letter for pending litigation.  One item of concern to them is incurred but unbilled legal fees.  You can request that directly from your attorney.

o   If you have significant litigation, prepare a management summary/analysis and evaluate for potential disclosure

·         Notes Payable and Current Portion of Long-term debt