Accounting System Cleanup – Why and When?
Clean and accurate accounting records are critical for three main reasons:
- Making informed decisions
- Working with lenders and investors
- Avoiding audits or responding to IRS inquiries
If you have been in business a while, even a short while, you could have issues with your accounting system and data that can mean trouble later.
Do you have an accounting system or data problem?
Depending on the age of the company and how long since they have conducted an audit or cleanup, there can be minor issues all the way up to major discrepancies or audit risks. These are common signs of problems:
- Cash discrepancies
- General ledger errors
- Excessive business expenses
- Missing retained earnings
- Unauthorized withdrawals
- Inconsistent fixed asset depreciation
- Negative cash or credit balances
- Customer or vendor invoice inconsistencies
- Bank fees and penalties
- Restricted payment terms from suppliers
- Asset overestimation
- Messy business loan records
- Static inventory levels
- Interest on cash or credit accounts is not accounted for
These are signals that you have problems in your accounting process and records. Any of these, or several, should result in an immediate cleanup of your records.
7 Common Problem Areas to Address in a Cleanup Process
You do not necessarily have to address these in the order presented, but all are important for a thorough cleanup process:
- Match retained earnings with your tax returns – Shareholder equity includes retained earnings. If the retained cash/earnings after cash have been paid out, there is probably a problem.
- Reconcile your cash accounts – It is critical that cash inflows and outflows match your bank account records. If not, you can run into problems with collections of receivables or in payment to vendors. These reconciliations should be done regularly.
- Capitalize fixed assets- You should be following a depreciation schedule for property and equipment so that you are not overestimating their value on the balance sheet.
- Verify your inventory levels – Accuracy of inventory levels is crucial, as their value is considered as convertible to cash at any point in time. Gains and losses during the year must be recognized for an accurate presentation of inventory availability.
- Be sure to account for all assets – Do not miss accounting for every asset of the business. Assets like intellectual property cannot be counted like inventory but should not be overlooked. There should never be negative balances for assets.
- Reconcile your credit card statements – Credit card accounts should be reconciled just as you do bank statements and checking accounts. Be sure to book interest on credit lines as an expense as well.
- Track any inter-business loans – When you own multiple businesses, it is critical to closely monitor and account for transactions, cash movements, or asset transfers. This is necessary to properly account for income and expenses for each business separately. Mistakes in this area is likely to trigger an IRS audit.
The size of your business is does not matter, as these are all issues that can negatively impact any business. Taxhive has a business cleanup service that takes care of these functions for you.