Year End Accounting Checklist included, Lists are great! Ask this guy

As a small business owner, there are a number of checklists you will have to prepare and complete. The one we want to discuss with you today is your Year End Accounting Checklist.

And if you stick around, we have a freebie to share with you at the end! (Don’t skip to it, c’mon.)

According to the Small Business Report Accounting, 60% of the small business owners feel that they might not have enough knowledge about finance and accounting.

This checks out as finance and accounting are specialisations that require theoretical and legal knowledge. A part of your business’ credibility is reflected in your financial statements. Poor accounting and finance practices can hurt your business by

●     Making it vulnerable to criminal activities

●     Rendering your financial statements untrustworthy

At the rate 2022 is going, we suppose we’ll wake up to November tomorrow and December next week. Thus we find it imperative that you are well equipped with a year end accounting checklist for your small business.

Accounting can’t be that important, right?

Wrong. And what better way to let you know just how important it is than to list out some of the downsides of poor accounting to you? We could call this the list that you’ll have to suffer with if you don’t check all boxes on the year end accounting checklist.

Lack of strategy

Strategy is the backbone of a business. Long term and short term goals mapped out with timelines and direction is what ensures progress. And in order to strategize, you need to know your current position.

Poor accounting will not give you a clear picture of your financial position. Thereby restraining you from making optimal strategic decisions for your small business.

Tax Deadlines

A smooth accounting system allows you to be ready in time for your tax deadlines. By keeping a regular check on all accounting practices, the files are ready for submission.

The flipside is tardiness in bookkeeping which leads to last minute cramming of work and a strong possibility of missing tax deadlines which opens up a world of penalties and possible IRS audits. We don’t want that, do we?

Cash Flow Issues

Simply put, cash flow is the incoming and outgoing cash in your business. Cash Flow issue is a natural consequence of poor accounting. And being unaware of what you have, what you owe and what you’re owed can prove detrimental to your business.

Pricing Hazard

The cost of your product is half the game. Hear us out

Your pricing and in turn your business’ sustenance is collateral damage to poor accounting.

Possible Fraud

Weeding out the mistakes/potential accounting frauds with a poorly maintained back office is the equivalent of finding a needle in a haystack.

Internal frauds are a slow poison to the lifespan of your business. It might be too late when you find out about any such criminal activity. It’s important to have an organised system of bookkeeping, regular checks and external audits to minimize the possibility of internal frauds.

The Usual Errors

Now, mistakes are inevitable, even when it comes to your accounting practices and your year end accounting checklist in particular. So we thought we’d list out a few of them, just so you can keep a lookout.

●     Lack of automated processes

●     Handwritten accounting books

●     Profit = Positive cash flow

●     Disregarding small entries

●     Forgetting the existence of a calculator

●     Lack of check ins with the accountant

●     Making late data entries

●     Lack of regular audits

●     Lack of external audits

●     Incorrect reconciliation of books

Onto the Good News!

All of this can be avoided if you just had a solid year end accounting checklist and adhered to it. We understand, you’re running a business, you have a tonne of things to do at all times.

To make this easier for you, we’ve come up with a solid checklist with step-by-step guidance. Give this a good read and don’t bother with note taking (we’ve got you covered with a small surprise!).

The Go-To Year End Accounting Checklist of your Dreams

Step 1 – Get your Financial Statements in Order

Verbatim from Investopedia, ‘’Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.’’

The Three Types

These three make up the financial statements of a business.

1. Balance Sheet

This statement is essentially an overall business view from a financial standpoint. It is prepared at the end of every fiscal year. A balance sheet is a record of the assets stacked up against the business’ liabilities and shareholders’ equity.

2. Income Statement

The income statement is prepared in order to derive the earnings per share. This is done by assessing the revenue and comparing it with the expenses, the difference of which leaves us with the net income. These statements are prepared on a quarterly and/or yearly basis.

3. Cash Flow Statement (CFS)

Year end accounting checklist, item number 3. The CFS is prepared to assess the business’ ability to pay off debt obligations, fund investments and the like. It’s prepared as a complement to the balance sheet and the income statement.

Step A – Prepare a Balance Sheet

Here is a basic format of a balance sheet for you to have a visual for the following notes.

Step I – Date and Time

Your balance sheet should be prepared on an annual basis. The date being December 31st or the end of the fiscal year of your country.

Step II – Identify Assets

Your assets are going to be tabulated individually and the total asset value is shown across the sheet as a sum total. The assets are listed under two categories.

Current Assets	Non Current Assets
Cash and cash Equivalents	Property
Short term marketable securities	Long term marketable securities
Accounts receivable	Goodwill
Inventory	Intangible assets
Other current assets	Other non current assets

Step III – Identify Liabilities

Liabilities have a similar format of being presented as the assets. And these too are categorised as current and non current liabilities.

Current Liabilities	Non Current Liabilities
Accounts payable	Deferred revenue (non current)
Accrued expenses	Long term lease obligations
Deferred revenue	Long term debt
Current portion of long term debt	Other non current liabilities
Other current liabilities

Step IV – Shareholders’ Equity

If your business is privately held entirely by you, the calculation is simple. On the other hand, if the business is publicly held, there will be a few more factors to the calculation.

Your line items will look something like this –

●     Common stock

●     Preferred stock

●     Treasury stock

●     Retained earnings

         Step V – Stack up Assets against Liabilities and Shareholders’ Equity

         This is when the balancing happens. And both sides of the sheet should tally.

If there are any discrepancies, it’s possible there were some errors made. Double check all aspects of the balance sheet and make sure it tallies in the end.

Step B – Prepare Income Statement

Step I – Reporting Period

As mentioned, these statements can be prepared on an annual, quarterly or even a monthly basis as per the business requirements. However for publicly held companies, annual and quarterly income statements are mandatory.

It’s a healthy practice to prepare monthly income statements as it helps in assessing the profit/expenditure position of the business and thus helps with decision making.

Step II – Revenue Calculation

The total amount generated from sale of product/service is your revenue. Total up all the sale entries in your trial balance and calculate the total revenue earned in the reporting period. Accrued earnings are to be accounted for as well.

Step III – Cost of Goods Sold

You’ve calculated how much you earned in the revenue step. Now add up all the costs incurred for the finished product like direct labor, raw material and other overheads involved.

Step IV – Gross Margin Calculation

Gross Margin = Revenue – Cost of Goods Sold.

The amount you earned grossly is calculated as above.

Step V – Operating Expenses

These expenses include money spent on selling and administrative tasks. Add all such expenses from the trial balance and mention them as one amount under operating expenses.

Step VI – Income Calculation

You have your gross amount earned and expenses incurred. Subtract this to come up with the pretax income.

Step VII – Income Tax

As per your state tax regulations, multiple the pretax income with the applicable state tax percentage.

Step VII – Net Income

And voila! The last step is to subtract the tax from the pretax income to derive the net income for the reporting period.

Easy enough, so far? Take a KitKat break, if you must. The year end accounting checklist will wait.

Step C – Prepare Cash Flow Statement

Step I – Gather the required documents

Balance Sheet – As at the end of the current financial year and beginning of the financial year or the respective reporting period.

Statement of Comprehensive Income – P&L Profit & Loss) statement + any other income statement recorded for the reporting period.

Statement of changes in equity – if any, for the reporting period.

Statement of Cash Flows – Of the previous reporting period. This is not required but it helps as a source for any discrepancy gauging in the current statement’s preparation.

Step II – Changes in Balance Sheet

A balance sheet has two sections. The assets against the liabilities and shareholders’ equity. This step requires you to make a table with three columns.

Column A should have the item of the balance sheet (Eg. Current Assets). Column B should have the closing B/S figure of this item and in Column C you have to enter the opening B/S figure of the item. Add a Column D where you mention the difference between Column B and C.

Note: Enter Assets with a + sign and liabilities and shareholders’ equity with a – sign.

What this allows you to do is assess the changes in the B/S over the reporting periods. The total of this should ideally be 0 (make sure not to include any subtotals).

Step III – Enter changes in the balance sheet, in the statement of cash flows

The skeleton of your statement of cash flows should be ready to be filled in now. You can go ahead and replicate line items from the previous reporting period’s statement as they will be the same, more or less. Make sure to leave some lines for any new items.

Any changes in the balance sheet will have an impact on this statement, thus this step.

An example of making entries in the statement – change in your property, plant, and equipment (PPE) is -10,000. Enter this figure in the investing part of your blank cash flows under the title “purchases of PPE” (as a change was minus 10,000, it means that the company spent the cash to purchase PPE). Be careful with the + and – with all the entries as that will be required to calculate the total at the end.

Once you are done listing all the changes, you’ll be left with two columns in the statement. One mentioning the line item and the other, the figure of change. Total the second column up and you should be tallying it to 0. If not, please make sure to go back and check for discrepancies between the changes in balance sheet and the entries made here as a result.

Step IV – Non cash item adjustments in the statement of comprehensive income

All you’re doing here is identifying possible non cash transactions in the profit and loss statement and the statement of comprehensive income combined. A few non cash transactions to look out for are:

●     depreciation expense

●     interest income and expense

●     income tax expense

●     The expense for recognition of income from derecognition of various provisions

●     change in revaluation reserves

●     foreign exchange differences at the end of the period

●     revaluation of certain assets and liabilities at the end of the period

●     barter transactions

Now comes the adjustments. Do each adjustment in a separate column. Making adjustments means adding one number to one caption and deducting it from the other one. It’s like doing double bookkeeping. The trick is to identify –

1) which captions in cash flows are impacted by non-cash item and

2) where is the plus side and where is the minus side.

Step V – Non cash item adjustments from other information

As mentioned in Step IV, there are other sources of information for non cash adjustments.

For instance, there is a new material lease contract signed. On one side, there’s machinery acquired via cheque and on the other side, there’s an increase in the loan or liability without having received any cash. This is a blatant non cash adjustment waiting to be recorded.

Remember, the resultant effect should be 0.

Step VI – Movements in material balance sheet items

You know that nagging feeling you get to run back up the stairs and ensure you have locked your apartment door properly? This is the double check you want to do for the statement, just to be sure.

It’s super simple. Pick out the item totals in the balance sheet and reconcile their movements between opening and closing balance. Check if all these movements have been accounted for in the statement of cash flows. And you’re golden!

Stp VII – Final Stage

You’ve pretty much completed all the individual steps and ensured your tallies all add up to a 0. What are you left with?

●     1st column being the headings and titles of your statement of cash flows,

●     2nd column being the changes in the balance sheet, and

●     3rd–xth columns being individual adjustments.

Now add a final column that is the ‘’Statement of Cash Flows’’. Make line totals across the X axis and you’ll arrive at the final column reflecting all the cash

movements.

Step 2 – Get your Receipts in Order

Step A – Note them down

You know what they say, write it down so you won’t have to remember.

It’s a good practice to leave a note on each receipt. You can leave out the obvious ones like purchase of stationery on a monthly basis. We’re talking about business dinners and other such receipts that require some explanation at the time of accounting for them.

It’s best to make this a regular practice, making it easier for you later.

Step B – Paperless or nothing

At this point, this should be a given rather than an explanation.

Trust us when we say just how much it helps to organize your receipts on an excel file instead of working with stacks of different sized pieces of paper. And you know what? If excel doesn’t work for you, you can always store the receipts in the form of e documents or in image format. There are multiple ways of going about it digitally.

Bonus is being able to search for any receipt easily and having a backup of all the receipts as well.

Step C – Categorically speaking

This whole process is an organised person’s paradise. Anyway, now that you have all the receipts at hand, sort them into the following categories. This way, you have any receipt you need to pull up ready at your fingertips within no time.

○     Advertising and Promotion

○     Meals and Entertainment

○     Travel

○     Rent

○     Utilities

○     Communication

○     Supplies

○     Postage and Mailing

○     Legal and Professional Fees

○     Insurance

○     Licenses and Dues

○     Charitable Contributions

○     Gifts

○     Education

Note: Adopt a system of organising your receipts and stick to it for best results. Be sure to charge all receipts to a corporate card for smooth recording.

Step 3 – Past Due Invoices

All businesses (okay, most) have accruals at the end of the year. Use this step as a reminder to reach out to debtors and collect money owed.

Let’s be realistic, not all customers will pay you smoothly. What best you can do is –

●     Set up payment terms (e.g., due dates)

●     Document the payment process

●     Send out payment reminders

●     Contact customers with past due invoices

●     Establish a payment plan with customers

Remember to maintain professionalism through the process of asking for payments due. Be empathetic of their situation and try setting up a suitable payment plan that works for both parties. Any rudeness can cost you a customer and your reputation.

Another medium to consider is hiring a collection agency to do the work for you. This naturally works on a commission basis but it’s worth the trouble if you’re unwilling to do the dirty work or simply don’t have the time for it.

Step 4 – Payroll Check

Heads up, different types of payments made to your employees are recorded and accounted for differently. And your payroll records are then used for your accounting reports. Things you can look out for –

●     Raises

●     Year-end bonuses

●     Withheld tax amounts

●     Benefits

Step 5 – Accounts Payables

This accounting item comes under the Liabilities in your Balance Sheet. Accounts Payable represents short term debts or amounts of money owed to suppliers/creditors. They include accruals as well – amounts that have been recorded but not paid off yet.

Not paying the amounts in the agreed upon period can make you a defaulter to the creditor. There is a four step procedure to audit the accounts payables:

Step A – For Completeness

This is perhaps the most vital part of the entire auditing process. The auditors will perform tests and reconciliation to make sure all purchases and cash payments are recorded properly. The auditors will then match payments to recorded payables.

Step B – For Validity

This one’s simple enough. The auditors reach out to the source (creditors or suppliers) to authenticate the accounts payable. They mostly pick a sample size depending on the number of creditors and carry out the validity process. In case of open invoices, they might even reach out to the business partners for verification.

Step C – For Compliance

Compliance is to do with the standard accounting principles to be followed. The auditors will go backward from the financial statements to picking out a couple of entries for compliance testing.

Testing the audit trail allows auditors to ensure the right accounting procedures were exercised.

Step D – For Disclosure

Disclosure of all accounting entries is imperative. This last step is for the auditors to ensure all the accounts payable have been accounted for and disclosed in the year end financial statements.

Auditors will perform an audit for disclosure by checking if the line items in the balance sheet have accounted for all entries. And as a final step, they might ask the top management to furnish a letter attesting that all financial statements correctly represent accounts payable and purchases.

Step 6 – Bank Reconciliation

The process of reconciling your bank’s account statement with yours to make sure all entries tally. If you use online banking, you can just download the statements and reconcile the entries.

A quick step-by-step breakdown

 Step A – Compare the deposits

The debit side of the bank column of your cashbook has to be compared with the credit side of the bank statement and vice versa. The items appearing in both the records should be marked.

Step B – Adjustment of bank statements

Adjust the bank statements to the corrected balance by –

• Adding deposits in transit,
• Deducting outstanding checks and
• Adding/deducting bank errors.

Step C – Adjustment of cash account

Now that the bank statement is taken care of, the cash account in your business records should be adjusted as well. This is done by –

• Adding interest or
• Deducting monthly charges and overdraft fees. 

Step 4 – Compare balances

After adjustments from both sides have been done, the adjusted amounts should be the same. The process of reconciliation should be repeated until they are the same.

Step 7 – Inventory Audit

If you’re a business that sells product, you have inventory. Considering that’s a portion of your business investment, it’s important to audit the inventory as a part of the year end accounting checklist. Match it with your balance sheet and make sure there are no discrepancies.

Some pointers to get you started:

• Pre-count slow moving items
• Pre-numbered tags for the different parts with space for details of the person who audited it
• Assessing the time and labor that will be required for the audit
• Write off obsolete items
• Dissect the location into different sectors to be covered by two person teams. This minimizes the chance or error/fraud.

Step 8 – Business Goals Renewal

At this point, your financial statements are ready. Use them along with customer feedback and team inputs to assess the fulfilment of the year’s goals.

• Did you accomplish what you set out to achieve?
• Did it go as per plan or did you achieve success in a different path?
• What were the shortcomings in your journey?
• How can you improve on them?    

Now write out a renewed set of business goals for the coming year. Yes, financial goals are important but they’re a part of your overall success. Management goals, marketing goals, etc should also be taken into consideration. All there is left to do is create an actionable plan to accomplish the goals.

Step 9 – Computer Back Up

We promise we’re not patronizing you. We know this one’s obvious but don’t we end up forgetting about the most obvious things sometimes?

As a business, you will have a lot of important accounting documents, client information and valuable emails that need to be stored in a safe and secure format. Make sure to back up all such files going into the new accounting year. Similarly, make sure your employees have an avenue to store all business related documents as well.

Step 10 – Contacts Back Up 

Read first line of last step. Your business contacts are invaluable. They need to be backed up at all costs. This means writing it down manually if you have to.

Step 11 – Download Important Files

The golden rule for data backup is 2:1. That is, create two separate digital copies, stored in two separate locations, plus one offline copy (preferably stored somewhere else).

Make sure to follow this by saving it in two separate digital locations and saving the third copy on a hard drive.

Step 12 – File Naming Conventions

File Names are often underestimated until you’re looking for a particular file of XYZ company and it’s saved under ‘’Aug_Filing_Report_2020’’. Bottom line, you’re never finding the file.

Adopt a company-wide file naming convention system for best results. This way, no matter the person saving it, the format will remain the same. Systematic and easy access to files at all times.

Step 13 – Review Finances

Schedule a meeting for this one. Discuss past financial position, steps to improve and additions to be made to the coming financial plan in order to maximize growth.

Five Questions that should be answered as part of an annual review are:

1. Is your investment strategy on track?

2. Are you saving tax-efficiently?

3. Are you protecting your income?

4. Are you preserving your assets?

5. How does your plan affect your family?

And there you have it. The ultimate go-to year-end accounting checklist for your business. We believe we’re ready for the CFA exam, what do you think?

Remember we asked you not to bother taking notes? It’s because we’ve curated a Downloadable Year End Accounting Checklist just for you. Now that you’ve read the detailed version, click here for the crisp version that you’ll require when you get to preparing your accounts for the year.

Until next time, take care and stay safe!