Bank reconciliations should have been reconciled for each cash account each month during the year and balanced to the general ledger activity. Since some accounting software systems don’t have a bank reconciliation feature, the reconciliation should be completed manually as soon as the statement is received from the bank.
Sometimes uncollectible receivables are written off in advance of the CPA’s arrival. Most times, the office waits until the CPA arrives to write off these because they don’t want to affect their December monthly income with bad debts incurred during the year but not written off. A policy should be established to review the monthly receivables and write them off as they become uncollectible.
You should review Work In Process (WIP) and adjust the balance to actual per your open repair orders and or body shop tickets. Failure to do this monthly can cause a large adjustment at year-end.
Prepaid accounts should be detailed identifying the type of prepaid. Prepaid income taxes should also be reconciled for all federal and state estimates paid for the year and any uncollected overpayment(s) from prior year(s).
One of the most time-consuming processes during fieldwork can be fixed assets. To make your task easier, you should set up a detail forward schedule for all fixed assets or property accounts, using descriptions of the purchases as control numbers. The accounts should not only be reviewed to find posting errors, but to find any asset under your company defined minimum capitalized amount that was recorded as a fixed asset which should be expensed before year-end.
If you have started construction on a dealership building but is not complete as of year-end, then all related expenses should be reclassified to a prepaid account or a construction in progress account. These assets will begin depreciating after the construction is completed and the asset is placed in service. It can also be advantageous to have your accountant perform a cost component study if the project is significant to increase your depreciation deductions in the earlier years.
Your fixed asset activity should be reviewed to find any partial payments for an asset. For example, if a new sign has been purchased but only half of the cost has been paid by year-end, it should be either reclassified to a prepaid account or the remaining amount due should be set up in accounts payable with the full cost charged to fixed assets. For any fixed asset, whether it was abandoned or sold, your accountant will need to know the sale or abandonment date and the sale price, or if a was vehicle for retail, the cost used to place it into back into vehicle inventory for future sale. After these accounts have been reconciled, copies of all purchases for current year additions should be made for your accountant.
Officer note receivables and payables should be detailed by what the transaction was. If you have more than one stockholder, and you are using the same un-scheduled account, it could be a tedious project to separate the activity. Instead set up your schedule as a detail forward type with a control number for each stockholder and use the comment or the control two field for an additional description of each transaction. You should place copies of the account activity for the year in a folder for review by your CPA.
Throughout the year some accounts payable and accrued liability accounts accumulate differences. A good guideline is that the accounts should be adjusted to what was unpaid at month or year-end but due for the current month or year. For instance, accrued payroll tax accounts should tie to the payroll payments paid in the following month for the current month, quarter or year. Accrued 401k, as well as accrued interest, should be equal to what will be paid in the next month.
Notes payable and long-term debt are often misclassified on the balance sheet and are not reconciled monthly. Lines of credit are usually considered a current liability. Even if the agreement will be renewed, the contract often has a maturity date of one year or less. Your accountant will need copies of any line of credit agreements and floor plan payable agreements that were renewed or entered into during the preceding 12 months. You should also disclose any new debt or existing agreements that have been renewed in the months after year-end – but before your accountant issues their financial statements. Retain a copy of your monthly line of credit statements, which normally show the principal amount and the current interest rate and other terms.
Along with lines of credit, your accountant will need copies of any new long-term debt agreements generated during the year. Often monthly statements are not received on long-term debt or there are no amortization schedules to reconcile to. It is a good idea to contact the banks and request verification of the principal balances due at year-end by requesting a print screen(s) of the loan activity for the year. Your accountant will also need to know the current interest rate being paid and other terms.
An account often overlooked is retained earnings. The account detail should be reviewed for posting errors that were possibly made to the account throughout the year. The only entries that should have been made to the account are the entries given to you by your accountant for the prior year-end adjustments.
If you have posted any of your year-end adjusting entries in the month(s) following year-end, you should provide these entries to your accountant to ensure the adjustments are not posted twice.
Taking time before year-end to adjust your balance sheet and various income statement accounts will save you and your accountant time during your accountant’s fieldwork and probably numerous follow-up phone calls from them. Also, ask your automotive accountant for a specific year-end checklist of information needed for his workpapers. The list should include M-1 tax items (book to tax income adjustments), financial statement footnote information (if applicable), and review any questions and problems encountered during the prior year-end.
Starting to prepare for year-end before your fiscal year ends will minimize the hassles after year-end.
Vol 3, Issue 11