February 2012, Auto Dealer Today - WebXclusive
Year-end at an automotive dealership is undoubtedly the most stressful time the accounting office experiences. In addition to preparing 1099s, W-2s, and quarterly and year-end payroll tax reports; calculating month and year-end bonuses; and all of the other tasks required to complete a normal month-end, the office is faced with preparing for their CPA’s year-end fieldwork.
The office staff usually focuses on reconciling all scheduled accounts, especially balance sheet accounts, to ensure the general ledger balances are accurate. To help speed up the reconciliation of various account activity and balances needed by your CPA firm, we normally recommend most balance sheet accounts be scheduled and/or detailed on your computer system. We also recommend that various income and expense accounts needed for income tax returns and CPA-issued financial statements be scheduled. Some of the income and expense accounts we review at year-end, in addition to scheduled accounts, are often not reconciled on a monthly basis throughout the year.
Sometimes uncollectible receivables are written off in advance of our arrival. Most times the office waits until we arrive to write these off because they don’t want to affect their December monthly income with bad debts incurred during the year but not written off. We recommend a monthly review of receivables and write-off of uncollectible amounts as they become uncollectible.
Bank reconciliations should also be completed for each cash account to balance to the general ledger activity. Unless the dealership office personnel are utilizing the Internet to access their account activity and reconcile their accounts daily, completing the reconciliation is delayed because the bank statement doesn’t normally arrive until the tenth of the following month. The other problem is some software systems don’t have a bank-reconciliation feature. Therefore, the bank reconciliation is completed manually, which normally takes more time.
Officer note receivables and payables are often overlooked in the year-end preparation. Sometimes these accounts aren't scheduled, but should be scheduled by detail-forward control numbers which adequately describe what the transaction was. If you have more than one stockholder and you are using the same unscheduled general ledger 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.
You should review work in process 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 scheduled as a detail-forward account with control numbers identifying the type of prepaid. These should be reconciled monthly and at year-end. 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). Provide copies of wire transfers and check payments to support the account balances.
One of the most time-consuming processes during fieldwork can be fixed assets. There are several steps which can be taken to minimize the time spent on these accounts during fieldwork. To make your task easier, you should set up a detail-forward schedule for all fixed asset 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 which was recorded as a fixed asset and write off any of these items before year-end to repairs or supplies.
When a dealership construction or remodeling project has been started but not completed as of year-end, all related expenses should be reclassified to a prepaid account or a construction-in-progress account. These assets will begin being depreciated after the project is completed. 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, it should be reclassified to a prepaid account, or the remaining amount due should be set up in accounts payable and 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 it was a vehicle, 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 or sales should be made for your accountant.
Throughout the year some accrued liabilities accumulate differences. A good rule of thumb is 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.
Any accrued other accounts which are not scheduled, such as real estate taxes, should be reconciled at year-end. A description and amount of the unscheduled accrued other account needs to be provided to your accountant.
Notes payable or lines of credit 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 note agreement often has a maturity date of one year or less. Your accountant will need copies of any line-of-credit agreements and floorplan-payable agreements which were renewed or entered into during the preceding 12 months. You should also disclose any new debt or existing agreements which have been renewed in the months after year-end, but before your accountant issues their financial statements. Monthly line-of-credit statements normally show the principal amount due and the current interest rate and other terms. Ensure the account balance reconciles to the year-end statement and provide your accountant with a copy of the statement.
Along with lines of credit, your accountant will need copies of any new long-term debt agreements generated during the year. Often monthly loan statements are not received for 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. Long-term debt sometimes has a variable interest rate and your accountant will need to know the rate to calculate the current portion of the debt.
An account often overlooked is retained earnings. The account detail should be reviewed for posting errors which were possibly made to the account throughout the year. The only entries which 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 files. The list should include M-1 tax items (book to tax income adjustments) and financial statement footnote information (if applicable). Also review any questions and problems encountered during the prior year-end to attempt to eliminate potential problems this year-end.
Vol. 8, Issue 12