year end bookkeeping checklist & bookkeeping advice

For those who are new to owning a business, or even those who aren't and who might appreciate a check list, here is one I created for my QuickBooks clients. Though it applies to any business software you might be using - even if it's just a spreadsheet.

I might not have time to answer questions until February, but if you're curious about "owner's equity" or other terms, ask away and I'll do my best to explain. Just later.

Thankyou for this.  I have to say it looks very daunting from a beginners point of view.

This year is my first year with a proper business so I want to make certain I start well.  My theory is if I record all my income and I record all my expenses, and if these two numbers match the numbers in the bank account, then the government will be happy with me.  But I suspect it is a lot more complicated than that.

Any tips or tricks for a novice business owner?

I use QuickBooks Desktop Pro to record all the money coming in and going out of our business. I can see a "picture" of what's happening with business money at any time, and with just a few clicks I have everything my accountant needs come tax time. I have found it is best to get into the habit of recording things on a regular basis. I do it every two weeks. If you let the paperwork pile up without recording transactions (no matter what program you use), you'll dread the end of the year. And, needless to say, backup your files each time you make new entries...either in cloud storage or a device other than your computer.

I was thinking about QuickBooks but I only have one inventory item so I'm not certain it's worth the expense.  Also, I'm told that there are only four bookkeepers in town that know QuickBooks.  

I do like QuickBooks though. My friend uses it at his warehouse and I sometimes help out there.  It's brilliant to see everything, especially inventory management.  We can see at a glance what is on the shelf, what is pre-sold but not shipped yet, and how many more are coming in and when.  

Every two weeks sounds good.  I was going to do it monthly, but I think more often seems better.  I also need to find out what the government thinks is okay business expenses.  Typewriter ribbon can go in office supplies, but what about the coffee I bought when I was meeting with the printer's sales rep?  My head hurts just thinking about it.  

Ah, gosh, I see that the document I saved here is not really applicable to new, or simpler businesses. Let me see if I can rework things a bit.

Bookkeeping Goals
Basically, I think most folks want at least these few things taken care of by their bookkeeping. Of course, your business, or your preferences might have you adding much more to this list.

easy totals for filing year-end income taxes (or any other taxes)

easy totals for being able to tell if your business is doing well (or if not, where the shortfalls or overages have come from)

proper bookkeeping to avoid fines, penalties, audit protection, etc.

Audit Protection
Isn't this what we want, less stress if an audit occurs? Here's what I recommend so that you will "look golden" if you are ever audited. (In some areas of business, it's not "if" you are ever audited, but "when.")

have separate bank (and credit card/loan, if applicable) accounts for business and personal activity

reconcile business accounts to the statement each month

properly record cash activity or personal accounts used for business activity

have ALL deposits properly identified (in whatever bookkeeping system you choose)

avoid "miscellaneous" or other overly vague terms in your books

Bookkeeping Options/Recommendations

A. bank account download or reports

B. Excel (or other app) spreadsheet, checkbook register, or columnar pad/register

C. bookkeeping software

A. bank account download or reports

--.csv files - The simplest option here is to download a .csv file of all your banking activity (in your business bank account, of course) from your online bank account. A .csv file is a "comma separated values" file and is usually available to download from online from almost every bank these days. .csv files easily convert to Excel files, or Google Sheets or other app files for categorizing, running totals, etc. Just note that some banks only have limited time frames available online, so you might need to download regularly over the year before the data is no longer (easily) available. This is less common than it used to be, but is still a thing with smaller banks or small credit unions.

--other bank reporting - a lot of online banking is getting more and more sophisticated. Some online bank systems allow you to categorize income and expense within your own banking profile/online register and even set up budgets or analyze spending and cash flow. This often allows for reporting directly from your bank's online system, or having categories download with your other banking data (whether in .csv or other formats). If you use your bank's online billpay to pay your expenses, this often comes with a lot of reporting options as well.

--aggregate bank sites - in the past, I worked briefly with mint.com and looked at other free online services that will take all your online accounts and create one place for your to total and review them. For example, you might have a checking account with Bank of Mullein, and credit card with Daffodil Credit Services, and a savings account with Dragonfly Online Bank. Setting them all up through something like mint.com (which I haven't even checked to see if it's still operating) would give you totals for all three.

Note that it's still important to reconcile to the bank statement for these methods and note this somehow in your records.

B. Excel (or other app) spreadsheet, checkbook register, or columnar pad/register
However you get your data in to Excel, some kind of register, or even an old-school columnar pad, this is completely serviceable for a lot of small businesses. Again, reconcile to the statement each month.

C. bookkeeping software
When is it a good idea to level up to bookkeeping software and what are some options?
Here's when I recommend leveling up to bookkeeping software:

you have customers who owe you money over a period of time that needs tracking, invoices, and/or statements ("receivables")

you owe bills that need to be tracked over a period of time ("payables")

you have inventory to track

you have multiple loans or equity sources, or other tax reporting requirements like payroll or sales tax

Here are some software options to consider and a few of their rough price points:

QuickBooks (QB) for PC desktop - note that the Mac version is being discontinued - can be as low at $5-7 per month (U.S.)

QuickBooks Online (QBO) - more like $30-40 per month (U.S.)

FreshBooks - also an online version - might be similarly priced as QuickBooks Online

Wave.com - free and claims it will always be free

Xero.com - probably similar in price to QBO and FreshBooks

QuickBooks has almost held a monopoly on the small business bookkeeping software marketplace. It is what I know best and what most small business people know. When QB branched out in to QBO, the online version was really, really awful. They have since improved it quite a bit, though it's still a desktop software attempting to be reworked in to online software. While I have not worked with Wave or Xero, they were designed to be online applications, so I imagine they might work better than QBO. I have worked with Wave recently, and it's okay. It would suffice for simple enough businesses. (Here's an article on why a startup dumped Wave for Xero.)

Similar to going from a spreadsheet to software, IMHO, there are a few key reasons to go from a desktop app to an online app:

you want to make invoices on the go or onsite (at a client's or at a job site) with your smart device

you and/or your employees want to access the books from multiple devices (without a server or LAN, or WAN)

you have remote employees or other helpers (accountants, consultants, board members, etc.) who also need access to the current/live books

And YES to Jim's habit of recording regularly. We all are so distracted these days that we can't remember shit what that $20.52 was spent on.

Please record regularly to save yourself headaches.

I often see a similar problem with the linked banking. In desktop software, you can load "bank feeds" or import banking activity. In the online software, you can link your software to your online bank account and it will (usually) load in all your banking transactions for your "approval" or "matching" before they become part of your books. In all versions of doing this, there is software "training" that happens - anything from Staples get booked as office supplies expense, for example - and yet this "training" can go awry or become messy. Especially if your vendor names or accounts are overly similar.

IOW, with the bank feeds or linking, it's easy to become complacent and then have the activity categorized incorrectly, so even then, regular, thorough review is recommended.

Being self-employed in the States might be similar to being self-employed in Canada and other countries.

If a U.S. self-employed person makes enough net income, the IRS requires quarterly tax deposits. Penalties and interest can accrue if these deposits are not made on time.

The upside of being self-employed is that one can deduct other expenses (again, in the U.S.) such as:

travel costs (for your vehicle, this is the greater of either (a) actual expenses prorated per miles driven for business or (b) $0.545 per business mile in 2018*)

office supplies (this can include coffee, tea, and snacks for your office)

computer expenses

business meals - only 50% is deductible and you must note business purpose

unreimbursed tools, materials, etc.

training or education

licenses, dues, subscriptions

phone (only a business portion of cell phone use is allowed)

home office expenses such as internet and other utilities can be tricky to deduct - consult a CPA.

More info on U.S. self-employment tax at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center.

*Note that charitable and medical miles driven can also be deducted at the following 2018 rates (though these last two might be subject to expense itemizing thresholds - I'm not sure):
--54.5 cents per mile for business miles driven
--18 cents per mile driven for medical or moving purposes
--14 cents per mile driven in service of charitable organizations

For those filing taxes in the States, if you make less than $69k per year, there is free e-filing software available here:  https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free.

It's TurboTax and H.R. Block - the good stuff that folks usually pay for.

Tips and tricks for a novice business owner.  How you manage your own personal finances, will carry over into how you manage the business finances.  In order to have a successful business, therefore, meaning, successful cash flow, you first have to prove to yourself you can do a positive cash flow personally.  Living within your means and being debt-free, being frugal and being able to trust yourself with your own bookkeeping.  Teach yourself to do your own spreadsheet and keep it up to date twice a day, or do not bother dreaming about having a business; just work a job and be content with that.  The number one skill is cash flow management.  Can't do that without personal bookkeeping.  Putting money into a bag with holes will never work.  It has to be a self-discipline habit.  Every dime in a parking meter, every quarter in a laundromat, everything spent on groceries, it ALL gets recorded on your personal spreadsheet.  Unless you can become the master of this, the business is gong to forever struggle and become a very expensive hobby.  There cannot be a back door strategy or contingency plan.  Commit to making it positive cash flow or die trying.  Assets are what put money into your pocket.  Liabilities are the other things.  Furnish your office with brand-new furniture when thrift store furniture will do, is a classic example of the little foxes spoiling the vines.  Bad decisions abound, but there is exactly one BEST way to do a thing, or to solve any given problem.  And a whole bunch of lesser, "wrong" ways, that are to a greater or lesser extent, more costly than the optimum one.  There can never be an emotional reason to buy things any more.  Instead, the reasoning has to all be pragmatic and calculating.  Start the business as if your life depended on it.  Because it does.  Freedom isn't free.  Robert Kiyosaki has written another excellent book.  Yeah, another one.  Its title is Fake:  Fake Money, Fake Teachers, Fake Assets.  It's worth the twenty dollars.

I work with all kinds of mom-and-pop size and "solopreneur " businesses.

I think Jack has a decent point about the leaky bucket and good fiscal management for personal or business funds, and I enjoyed "Rich Dad, Poor Dad" by Robert Kiyosaki myself. Haven't read his new book.

I'd just like to add that I have observed a wide variety of very different money management styles. Surprisingly so.

Some people are able to hold a general tally in their head about the ins and outs of their cash. Such as, my monthly bills run about x per month, my income is about y per month; and then y minus x = about z per month. So they are on top of it. They often know how much extra funds they have for things like buying a latte, or eating out (or not). And they know if a car repair comes up that is $800, well, that might be far outside their norm, and they might need to cut spending or pull from savings to make up for it.

I'm impressed by these people because I can't keep all that in my head. Maybe it's because I deal with numbers for about 20 different businesses, (or that's what I tell myself - ha!) but I have to do it exactly, and know the exact amount left after income and expenses.

Other business people are so darn good at what they do, that if they focus on that, and are able to surround themselves with quality people to help with things like the bookkeeping, or other support services, then they can keep flying high providing high quality stuff for a high quality income. For the big picture folks or "high flyers" they often can't make themselves deal with the minutiae of a spreadsheet. I've observed that if they can review the big picture of what's going on with their support people (to watch for errors or embezzlement, etc.) they can keep soaring, and that's a very efficient business model.

The reality check is that some people go in to business thinking they will be a high flyer before they have even put in the time to be good at what they do. You've gotta have something (a product, a skill, a widget, excellent customer service, etc.) that people want, and are willing to pay for, before you can expand to having a robust support staff and dodge the drudgery of doing your own bookkeeping or other less desirable tasks.

I've also learned over the years that for some people, spreadsheets make their eyes go cross-eyed and then nothing makes sense to them. This has improved with younger generations getting more familiar with spreadsheets in school (which I understand is an ageist thing to say, sorry!), but i still think spreadsheet tallies are not for everyone. Most online banking sites provide reports and ways to categorize your spending these days. Or using an aggregating site like mint.com can work wonders for folks with multiple accounts or cards. All without a spreadsheet!

I like the idea that this thread continues and expands with what people do to track their business or side hustle. Such as:

method:  Is it a spreadsheet? Your online banking reports? QuickBooks, Wave, Xero, or FreshBooks?

frequency:  daily, biweekly, all at year-end?

help or no help:  do you hire a bookkeeper? do you enlist a CPA at year-end? do you use tax filing software, and if so, which ones?

resources:  where do you go for help? your trade , network or business group? a neighbor or friend? a professional? YouTube? or....permies.com?

I'll go with my responses, though since I do this for a living, my level of bookkeeping might be different than most. Or, I might surprise you.

Jocelyn Campbell wrote:

method:  Is it a spreadsheet? Your online banking reports? QuickBooks, Wave, Xero, or FreshBooks?

I use QuickBooks Accountant - which is a step above Pro and Premier, but not quite QuickBooks Enterprise. (Current version 2020, though as a QB ProAdvisor, I have every version available at any time. Most QB licenses are for three years, so most would use QB for three years then upgrade.) I supplement this with, at times, many spreadsheets.

In my client work, in addition to QuickBooks Pro and Premier, I have used QuickBooks Online, Wave, mint.com, lots of different online banking sites, and many kinds of spreadsheets and apps. In my non-self-employed past I used more robust corporate accounting software such as Timberline and property management plus accounting software Yardi.

Jocelyn Campbell wrote:

frequency:  daily, biweekly, all at year-end?

Almost daily these days, though depending on other factors, things have built up / backed up to being entered less often, such as weekly, semi-monthly, or even yearly. It's not fun to get that backed up and it really does become difficult to remember what was what.

Jocelyn Campbell wrote:

help or no help:  do you hire a bookkeeper? do you enlist a CPA at year-end? do you use tax filing software, and if so, which ones?

My books are simple enough that I do my own and I use H.R. Block tax filing software myself at year-end to file my own income taxes.

My clients have just about every other combo of help you could imagine. Bookkeeping for all or some things, accountants for some or all taxes, etc.

Jocelyn Campbell wrote:

resources:  where do you go for help? your trade , network or business group? a neighbor or friend? a professional? YouTube? or....permies.com?

At one time, another QuickBooks ProAdvisor friend and I started a QB Accountants support group. We met a few times, but then found we were all too busy to continue and/or didn't need each others' knowledge very much. Currently, I have a very small number of CPAs who will answer questions for me. (I am not quite a CPA myself, just below that.) Though this is a favor that I ask very rarely, and usually only from those whom I have sent new clients. I Google a lot or research on the related tax agency websites, or have taken webinars on topics where I've needed to know more. Unfortunately, I've found YouTube to have not very good details or even misinformation regarding some of the issues I work with on a daily basis.