Business and Personal Finance: Mapping Out Your Accounting Processes

Setting Up a System – Mapping Out Your Accounting Processes

You can start to develop your regular accounting procedures by separating your tasks by expected frequency: daily, weekly, monthly, quarterly, or yearly. General accounting chores will fall into each category, but tax- related tasks typically come up no more than monthly.

Every business will have unique needs, and your task schedule can be tailored to match whatever your company requires. Until you have a good feel for how things flow, though, the schedule laid out in this chapter is likely to be suitable.

To keep on top of your regular recordkeeping, enter transactions in the journals daily. Post to the ledgers at least weekly; if your company has a high transaction volume, post transactions more frequently. Once transactions have hit the ledgers, file the corresponding paperwork so you’ll be able to easily locate any documents you need.

ALERT!

Some accounting and tax chores may differ depending on your company’s legal structure. For example, some corporations have to file quarterly reports, whereas partnerships and sole proprietorships almost never do. Sole proprietors and partners, though, have to pay personal quarterly tax estimates; corporate owners or shareholders may not.

Daily and Weekly Tasks

For many small businesses, the first five items on the following list will be daily tasks; the rest will be weekly. However, only you can judge your company’s transaction volume and tailor the schedule accordingly. For example, with a very light transaction volume, you may want to shift more items to your weekly list.

  1. Sort your mail into action piles (such as bills to pay and orders to fill).
  2. Inspect and stock any incoming inventory orders, and record the purchase transactions in your purchases journal.
  3. Process any new customer orders, record all sales transactions, and mail out any new accounts receivable invoices.
  4. Gather the day’s cash and checks, make up a deposit slip, and put any necessary entries in your cash receipts journal (and checkbook).
  5. Pay any invoices that are due or for which you can get an early payment discount.
  6. Record any checks that you’ve written in your cash payments journal.
  7. Record any cash transactions in the appropriate cash journal.
  8. Record any other transactions of the day in the appropriate journals.
  9. Post all journal transactions to the ledger accounts.
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Monthly Tasks

In addition to whichever daily or weekly tasks fall at the end of the month, make time to deal with all the recordkeeping and tax-oriented month-end chores. These tasks are often more complex than journalizing and posting transactions, and may take some time to accomplish, especially when you’re first getting started. Using accounting software can reduce your time factor for some things (such as report preparation), but even with that help, these tasks can take longer than what you’ve done so far.

ESSENTIAL

When you want to see fully accurate financial statements under the accrual accounting method, you first must write up adjusting entries to get your accounts exactly up to date. Adjusting entries cover income- and expense-related transactions that fit into this accounting period, even though the cash exchange took place (or will take place) in another period.

The most important job you have at month-end is to make sure all your accounts have correct balances. For some accounts, you will perform reconciliations, which means you will match your general ledger account balance with something else to verify its accuracy; if they don’t match, you can find and fix the error. For example, every month, you have to reconcile your cash accounts with corresponding bank statements (just as you do with your personal checkbook); also, you have to make sure that the accounts receivable subledger total balances with the accounts receivable account in the general ledger. While you’re in the accounts receivable ledger, prepare account statements for any customer with an outstanding balance.

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When you think all the accounts are accurate, prepare a trial balance to make sure your general ledger is in balance. If you want to look at rough financial statements for the month, you can create them once your trial balance balances. Once you have all the reports you need, you can close out your books for the month (unless you use different accounting periods for your company, such as quarters).

Once all your regular monthly accounting tasks are complete, you can turn toward tax responsibilities. Which chores you have to do depends completely on your business; you may not have to deal with monthly tax issues at all. If you have employees, you may be required to make a monthly pay- roll tax deposit. When your company has taxable sales, you may have to file a monthly sales tax return along with payment, depending on the state law and your company’s sales volume.

Quarterly Tasks

On the recordkeeping front, your quarterly tasks won’t be much different than regular month-end tasks (unless you close your books only quarterly). If you’ve got the time, you may want to take a look at how close your actual revenues and expenses are to what you’ve expected. For example, if you prepared a budget at the beginning of the year (or as part of your original business plan), you can compare your real-life results to those estimates.

FACT

Estimated taxes for owners are always due in April, June, September, and January. The only difference for corporations is that they have a December due date instead of January. Each of these due dates falls on the fifteenth of the month. If the fifteenth falls on a weekend, the due date shifts to the following Monday.

From the tax side, the end of a quarter usually brings a lot of responsibilities. First, if your business structure is anything other than a C corporation, or a limited liability company (LLC) taxed like a C corporation, you and any co-owners must file personal quarterly estimated federal and state income taxes. C corporations must file their own quarterly estimated income taxes. (See Chapter 16 for a discussion of both.) In addition, most companies with employees will have to file payroll tax returns each quarter, sometimes along with payment. Finally, you may have quarterly sales tax reporting obligations, depending on your state law.

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Annual Tasks

As you might expect, the list of year-end chores is pretty long. On the accounting front, you have to do the following:

  • Pay every bill that you want to be able to deduct in the current year (for cash basis)
  • Prepare adjusting entries
  • Verify your trial balance
  • Create comprehensive financial statements
  • Set a budget for the upcoming year
  • Close out your books for the year
  • Set up your journals and ledgers for the upcoming year (only for manual systems)

Turning to taxes, the list is just as long, but many of the chores can be grouped together. First, the payroll responsibilities (see Chapter 9): In addition to all your normal payroll filings, you must provide a personal tax statement to each employee. A copy of each of these, along with a summary report, has to be sent to the federal government. The annual federal unemployment tax return is also due at this time. (State requirements for payroll reporting may vary.) If you paid any nonemployees during the year (for job- like work), you have to send them personal income reports as well, and copies of those along with a summary statement to the IRS.

Year-end is also income tax time. You will have to prepare both the company tax returns and your personal tax returns (in that order), for both the state and federal governments. As you’ll learn in Chapter 16, these forms can get pretty complicated, and it may be easiest to enlist the help of a qualified professional.