Startup - Year-End Accounting Close Checklist 2020
2020 is almost coming to an end. That means it’s time for year-end accounting and tax filing. For many this could be a tiny bit dreadful, especially when you’re on your own. Not to worry! That’s where we come in.
To help founders like you stay prepared, we made a checklist for startups with a C-Corp tax structure. Our goal is to help you wrap your head around the details and give examples for how to knock these tasks off your list.
Download the checklist here and tick each item off with your CPA. Download Year End Close Checklist
Accounting year-end close – complete, review and reconcile financial data:
In accounting, year-end close means you recorded all transactions from that year, reviewed them to make sure they are correct, and reconciled bank and credit card accounts.
Here is the list of the tasks your startup needs to do for year-end close:
1. Finish recording financial transactions in your accounting book
1.1 Add banking transactions into your accounting books - revenue and expenses
Start with finishing up recording banking transactions for the money came in and went out (revenue and expenses). Have bank and credit card statements next to you, so you can compare when needed.
1.2 Record the depreciation expense for fixed assets
Remember to deduct the expenses that are not directly money related, for example, fixed assets. You also want to maintain a monthly depreciation schedule as a support document. Record the depreciation expense for your fixed assets, such as laptops, lab equipment, company cars, etc.
1.3 Set up any accrual entries
Let’s say a worker puts time in for the firm but hasn’t been paid as of month end—that’s when an accrual entry needs to be set up (Wages Payable). If that’s the case, then you need to ask if there are any bills that need to be paid (which haven’t been) or any cash owed to you. Once that’s done, an accrual entry needs to be set up to reflect that. Work with your CPA, they usually have a list of accrual entries they know most companies need to record. Make sure to check with them on this. Like with many tips in this guide, it’ll save you time, money, and effort.
1.4 Reconcile your bank and credit card accounts
The goal here is to verify that you have the same dollar amount in your bank account and in your accounting books. This step serves as a foundation for verifying the accuracy of money movement; if someone were to review your accounting books, they would start from your bank reconciliations. Make sure that you have reconciled all the bank accounts for the month and that the ending balances from the bank match with your accounting books (otherwise there may be a problem).
1.5 Write off bad debt
Bad debt is money you’re not able to collect from doing a service or delivering goods. Here’s how the process typically plays out:
Keep in mind, you still need to create a record of every effort you made to collect payment from your customer. If you get audited, you’ll need to show proof (e.g. emails, letters, reminders sent to customers).
Summary: why proper year-end close is key
The year-end close process is used to make sure financial transactions for the month have been organized and recorded following GAAP. As a business grows, so do financial transactions. For most companies, it takes 1-2 months to do the year-end process and close the book. But it all depends on the volume of transactions, be sure to get started early!
Clean up your financial statements
Financial statements mainly refer to a Profit and Loss statement and Balance Sheet, and are some of the most reliable data sources founders can use to make decisions. For tax filing, you will need to submit the Profit and Loss statement and Balance Sheet to the CPA to calculate the tax amounts.
2. How to Cleanup a Balance Sheet
What’s a Balance Sheet?
This provides insights on what your business owns (assets) and owes (liabilities and equities), at a specific point in time. It is a snapshot of your company’s financial condition. Compared to a P&L, the Balance Sheet shows your financial condition at one moment, whereas the P&L shows what happened over a period of time.
What are the different parts of a Balance Sheet?
Assets = Liabilities + Shareholder’s Equity.
Keep this equation in mind when you’re going through your Balance Sheet. It’ll come in handy when you’re figuring out how to balance your debits and credits. A Balance Sheet always balances out. The only time it won’t is if your accounting software has a problem or there’s a mistake. If your total assets don’t equal your total liabilities and shareholder’s equity, it must be fixed ASAP.
How to clean up Balance Sheet:
2.1 Verify total cash amount
Your total cash amount is listed on the top of your balance sheet. It’s the first thing people will notice. Make a great first impression by keeping a healthy cash reserve. It’ll impress potential investors and bank officers which could give you a significant advantage in the startup game.
2.2 Review accounts receivable (A/R)
This indicates how much money your customers owe you. This could get tricky so it’s critical to manage your A/R carefully. Giving customers a long time to pay might sound appealing to them, but it puts pressure on you to have enough cash for other expenses. In some cases, it can stimulate sales but that all depends on timing and, again, how much cash you have on hand to cover other expenses.
The period of time you allow customers to pay you is called a Credit Policy. Balancing what customers want (more time to pay) and what you want (payment now) can be challenging.
When deciding on your Credit Policy, consider your cash needs now, total expense costs and when you need to pay them, industry norms (e.g. Net 15, 30, 45 or due today), and customer expectations. That might sound like a lot, but you can start by reviewing unpaid invoices and creating email/text templates for reminders (sent weekly). The sooner you collect payment, the better. Long outstanding or unpaid invoices eventually become uncollectible, which results in bad debt. No one wants that.
2.3 Inventory balance should match with physical counts (if applicable)
If you sell physical products, inventory could become one of your biggest headaches. Having too much or too little can cause problems.
Having too much, you’ll run the risk of tying up cash which leads to cash flow challenges. Inventory can also get stolen, expire, lost or become obsolete. There are many risks to having too much inventory.
Having too little runs the risk of not being able to make sales or meet customer demand. Finding an optimal level of inventory means balancing the cost of ordering, shipping costs, storage/insurance costs with your physical space.
Remember, there are different ways to record your inventory value: FIFO, LIFO and Average Cost. You also want to link inventory cost to Cost of Goods Sold (COGS) on your P&L for an accurate inventory count. It’s not easy so it’s important to consult with your CPA to capture inventory accurately right from the start.
2.4 Record depreciation for fixed assets
Do you own fixed assets? Have you been recording the monthly depreciation expenses? Make sure to record monthly depreciation expenses and remove assets that have been fully depreciated. Most assets depreciate on a straight line (same amount every month), some depreciate on an accelerated basis (amount increases every month), or units. GAAP has clear guidelines on the type of depreciation method to use.
2.5 Check investors’ equity against cap table
This represents how much money your company has currently borrowed from investors. Try not to make any mistakes on recording investors’ equity on your Balance Sheet against the cap table. Investors won’t be very happy.
2.6 Know your retained earnings
Retained earnings is the cumulative amount of earnings since the corporation was formed minus the cumulative amount of dividends that were declared. Retained earnings show how much money your company has made over time, but this is NOT cash. If your startup is running losses, this number will be negative. Your goal is to grow the retained earnings number overtime, from negative, to breakeven, to eventually positive. The sky’s the limit!
A CPA’s 2 cents
A Balance Sheet is a snapshot of your startup’s financial health. It tells a story of what your company owns and owes. Your Balance Sheet can really come in handy, it’s a useful tool for tightening up your operations and preventing mistakes.
3. How to Clean up a Profit and Loss Statement
What’s a Profit and Loss Statement?
These show a company’s revenue and expenses during a given period. They’re also known as Income Statements, but most people call them P&Ls.
P&Ls are used for:
1) Investor’s financial package: View a company’s performance.
2) Business decisions: Shows managers where money is spent (expenses) relative to the revenues.
3) Bank loans: Lets lenders see a company’s performance.
4) Tax returns: an important starting point for filing tax returns.
How to clean up P&Ls:
3.1 Verify revenue/sales
Revenue/sales is the first section on a P&L. It shows the total sales your company has made in the month of January. If you sell your services/products on a platform like Amazon, make sure the sales number there matches with QuickBooks. If not, you’ll need to find where the difference comes from and fix it. Any discrepancies between sales platforms and accounting platforms might lead to the risk of being audited.
3. 2 Check the expenses
All the costs related to running the business are called operating expenses (SG&A expenses short for Selling, General and Administrative expenses). They are different from COGS, as these expenses relate to your business operation. An easy way to think about it is if you’re not selling products/services today, you still need to pay operating expenses.
The main expense categories are:
- Employee salaries and wages and other payroll costs
- Marketing and sales costs (e.g. marketing, advertising, etc.)
- Office rent, supplies, utilities and software
- Fixed asset depreciation expenses
3.3 Understand your net income
Net income = sales – expenses.
Net income is what your company actually earned and can be distributed to shareholders. Basically, it’s the number you also pay taxes on.
Additionally, if your startup has subsidiaries, you also need to prepare financial statements on a local and consolidated level.
Prepare financial statements for each standalone foreign entity at both a local level and on a consolidated basis at the US parent company. Foreign countries have different accounting standards which consist of their own version of US GAAP, IFRS or other standards. Most countries are converging to following IFRS, but there are many exceptions to this rule. When in doubt, ask the government tax authorities in that jurisdiction.
4. Yearly Mandatory Task - 1099 filings for contractors
The next mandatory tax related task is to file 1099s for the contractors, every January. Here is a quick summary on what you need to know about filing 1099s.
The deadline
Usually it is the last day of January, for example, for next year it is Feb 1st, 2021. If you file your 1099s late, the penalty is $50 per 1099 filing; the penalty amount increases as time goes on.
Who do you issue a 1099 to
You need to issue a 1099 to any independent contractor, service provider, freelancer or vendor who is a self-employed individual AND has been paid over $600 in a calendar year (from January 1st – December 31st) by your firm.
Keep in mind: C-corp and full-time employees DO NOT need to issue a 1099. 1099s only apply to freelancers, contractors, single member LLCs and S-corps.
5. Review with management
This is where you loop in your management team to review your financial statements, line by line. You’d be surprised by what you find. If you have any questions, consult your CPA.
6. Submit and watch your CPA calculate your Income Tax
Balance sheets and Profit and Loss statements are the two main financial statements that are used to calculate income taxes owed. Once you review and finalize your financials for 2020, you can send them off to your CPA. They’ll review and crunch the numbers for you. Experienced CPAs spot errors easily and know how to fix them and often provide advisory services too.
To wrap up, we covered:
Recording transactions from 2020
Cleaning up your Balance Sheet and Profit/Loss Statement
Payroll entries and filing 1099s
Performing management reviews
Submitting documents to your CPA
These 5 steps will help get you through accounting year-end close.
Believe it or not, we’re just scratching the surface! If you have any questions at all, don’t hesitate to reach out. I’m always happy to go over your options and help steer you in the right direction.
