Checklist To Clean Up Bookkeeping Records
Business owners meet lots of messes on daily basis, ranging from back room inventory overflows, problems of schedule, to errors in preparing invoice, among others. Messes in business lead to troubles, hassles, sleepless nights, and if uncurbed, can kill a business untimely. Unfortunately, messes are inevitable as a result of the way we run a small business.
However, bookkeeping and accounting records should not at any time be one of these messes found in a company.
You tend to make informed decisions when you have good data, which is sufficient reason to regularly clean up your bookkeeping records. Clean financials records are not just admired, they're specifically required in certain cases.
For example, investors who wants to acquire the company or partners often request for clean financial records before investing into the business. Handing over an awful financial data can ruin an unfinished deal or later results to fines from regulatory authorities.
In order to qualify for PPP, EIDL or other government economic stimulus funds, you must present financial reports - for which proper bookkeeping is necessary. Some individuals have not been keeping up with their bookkeeping, and with this checklist they can approach the job more efficiently.
Moreover, bookkeeping records are mandatory in the likelihood of an audit. Failure to provide them can lead to delay in audit process and providing insufficient records can lead to penalties and other distasteful outcome. Your business needs clean books to thrive.
Checklist To Clean Up Bookkeeping Records
To clean up your records, there are some bookkeeping cleanup checklist which are very important. Firstly, you have to find out if there is a problem in book, scrutinize problem areas, then troubleshoot detected issues.
Below is a comprehensive explanation on some important bookkeeping Cleanup Checklist:
1. Find out if there is a Problem
Before you carry out a formal audit of the books, it is very important to know if there is truly a problem or just assumptions. Normally, businesses with a very messy bookkeeping records know that there are issues that need urgent attention.
However, businesses with little errors or small insignificant problems may not comprehend the genesis of the problem and the technique to redress the root issue.
There are some common signs which can show you that there are issues in your bookkeeping records, these errors are:
- Absent of retained earnings
- General errors in ledger
- Cash miscalculations
- Unapproved withdrawals
- Extravagant business expenses
- Bank charges and penalties
- Inconsistencies in vendor and customer invoice
- Overestimation of assets
- Irregular depreciation of fixed asset
- Negative cash or credit balances
- Constricted terms of payment from suppliers
- Stagnant inventory levels
- Interest on cash and credit accounts which are unaccounted for
- Disorganized business loan records
These issues stated above, are the signs of issues in the books. Hence, it is time for your business to clean up its bookkeeping records if any of these warning signals show up through bookkeeping clean up checklist
2. Scrutinize Problem Areas
Once it is apparent that there is a problem, the difficult aspect starts. The hardest aspect for business owners is often knowing where to find the cause of the issues. While you don't necessarily need to take these steps consecutively, they are the general place to find problems.
Keep up with this guideline when closing the books to efficiently audit financial records:
1. Match Retained Earnings with Tax Returns
Inside shareholder equity, there should be an agreement between retained earnings and tax return filings. You know there is a problem if the business does not have exact funds after paying cash to owners.
Beginning here gives a solid bedrock for the rest of your audit process because if there is a disagreement, then the problem is in the current fiscal year, which shows that there is no need to modify previous tax returns. It is likely that the issue is further in the past if there is no discrepancy, demanding an audit of balance sheets and earlier tax return records.
2. Reconcile Cash Accounts
It is crucial to make sure that actual cash flows match bank records which is also important for timely paying suppliers and partners, in addition to tracking customers on outstanding invoices. You should do a monthly cash reconciliations for each active bank account, or frequently for more accounts.
3. Capitalize Fixed Assets
Do a depreciation schedule on PPE (Property, Plant and Equipment) to keep away from overestimating their worth. The value of fixed assets are expected to decrease predictably until they finally become obsolete.
4. Verify the levels of Inventory
Inventory counts are information that show what a business has available to change into cash in a short period. This implies that verifying levels of inventory must be well-timed to give applicable information. Profits and losses in the year should be promptly separated from retained earnings to give a correct view of number of inventory available for the business.
5. Account for Other Assets
You should endeavor to appropriately account for both tangible and intangible assets in a timely manner. Tangible assets are assets we can see, feel and touch within a business, while intangible assets are the opposite. Tangible assets includes assets like intellectual property, which is valued to the business, but can't be seen physically (like inventory). All total assets must change over time instead of remaining the same. Moreover, asset balances should be positive always, this means that negative balances must be identified and fixed as a part of auditing.
6. Reconcile Credit Card Statements
Similar to reconciling bank accounts to ensure cash accuracy, credit accounts must be reconciled too. Wherever there is a perpetual balance, transactions occurring against the account should be brought together. Interest on lines of credit should be recorded as an expense. Don't forget that abnormal balance activity like a negative balance, needs extra check.
7. Track Inter-Business Loans
Where a business owner owns more than one businesses, movement of cash between them entails pinpoint record-keeping to avoid complicating the books of both businesses. Mindless of ownership, each business should be treated like separate entities otherwise there would be an increase of fraudulent activity and a tax audit becomes inevitable.
Doing a full financial audit is always difficult and slow. However, neat bookkeeping records are worthwhile. When your books are clean, it reduces employee stress, prompt better management decisions, and enables overall business activities to flourish.
3. Clean Up Problems
Cleaning up issues is the last on our list on bookkeeping cleanup checklist. Any business with messy books is prone to danger irrespective of its size, industry, or setup. But in spite of the glaring risk, some business owners overlook it or delay cleaning up their books. Time and time again, they are overpowered by the procedures of outsourcing an accounting firm or external auditor to audit their books. They often ask questions like, “How do I find the right accounting firm?”, “What is the cost?” and “Where do I start from?”
Remember, it is always more favorable to seek for help straightaway once an issue has been identified. Delay in the application of these bookkeeping cleanup checklist only give rooms for issues to worsen, needing more extreme measures to solve the problems in future. This is an especially key point because, according to the type of the problem, it may take a great deal of time to fix. Delaying seeking for help only puts the business in more risks as problems continue to increase while help is coming.
Giving internal employees the task to clean up the books can lead to more critical problems in future if problems are worsened by ignorant employees. The fact remains that many small and medium sized businesses lack the employees required to solve complex financial issues. Several bookkeepers and internal accountants are segregated from all the entire information they require to properly perform their tasks, and in most small businesses, the head staff doing bookkeeping tasks lacks financial background in totality.
This is the usually the reason why problems come up at the outset, which is why it doesn't make sense in any way to ask the person who started a problem to address the problem. Nevertheless, there is no need to be embarrassed because messy books regularly start from lack of knowledge. While a business owner may be great at their original daily tasks, they may as well simply lack the intelligence to be absolutely responsible for recording keeping.
However, in these situations, it is a great investment to hire an accounting firm to fix bookkeeping problems in your financial records because outsourcing these functions helps to save time, reduces losses, and assists the business to avoid fines.