Year-end closing procedures are an annual requirement for every business. Taking the time to do them properly will ensure that you don’t overpay or underpay your taxes, and can help to avoid potential fines from the IRS due to incorrect tax returns. To make your fiscal year-end accounting procedures more accurate and less stressful, use the following accounting best practices.
Don’t mix business and personal expenses.
Managing business and personal finances in a single account may seem easier, but it can expose you to financial and legal risk. If you haven’t already done so, take the time to separate all personal and business expenses before doing your year-end accounting. For 2016 establish separate business accounts, including a credit card and bank account, exclusively for business use, and run all business expenditures through those accounts.
Track all receipts.
Tracking every little business receipt can be a hassle, but the IRS requires you to keep receipts for any business expenses over $75. It’s also a good accounting practice because receipts provide the documentation needed to support the deductions on your tax forms in case you get audited.
Properly expense large purchases.
IRS rules state that purchases of equipment that will last more than a year must be capitalized. For example, printer cartridges would be written off as a one-time expense, while a new printer would be considered a capital expense. As part of your year-end accounting, check to make sure all major purchases have been properly itemized and expensed.
Double-check all independent contractor status.
Misclassifying employees as independent contractors can get you in hot water with the IRS, resulting in large fines and penalties. Take the time to understand the rules and regulations that define independent contract status and make sure you have a legal contractual agreement with all independent contractors.
Search for double transaction entries.
It can be easy to accidentally enter a transaction twice, which can cause you to overstate sales, overpay vendors, and create accounting inaccuracies. During your year-end closing, take the time to review all transactions for multiple entries. Performing this task at the end of each month will save a lot of time during year-end accounting procedures.
Most importantly, don’t wait until the last minute to complete your year-end closing procedures, as this can lead to accounting errors and costly mistakes. Developing the habit of updating the books on a weekly or monthly basis will reduce the amount of work required to close the books, improve your cash flow, and reduce the risk of errors on your tax returns.