December is a busy time. You barely have time for all of that holiday shopping, party planning, and entertaining. But December is year-end for most businesses. Once December 31st rolls around, you're stuck with whatever results are reflected on your financial statements. Here are a couple of things you need to check now to make sure your numbers are on track.
First, decide if you are planning for tax purposes or for financial reporting purposes, as the two objectives are usually in opposition. Financial reports generally get presented to a banker (book basis), while the tax information determines how much income tax you pay (tax basis). (You might need some assistance weighing the trade offs of any decision you make.)
Next, review the following items:
Inventory. If you sell products, inventory is the number one asset account that can impact your profitability. Take a physical inventory now and compare it to the carrying value on your financial statements.
Impact: If your inventory balance on the books is too high, a downward adjustment to inventory will reduce your net income. If it is too low, an adjustment upward will have the opposite impact on net income. Typically inventory adjustments will impact both your tax- and book- basis net income.
Accounts Receivable. Review your accounts receivable for any uncollectable accounts. If all possible collection effort has been expended, you might want to consider writing off bad debts this year.
Impact: Writing off of a bad debt will generally reduce your net income for both book and tax, unless you have previously established a book reserve for bad debts.
Repairs and Maintenance expense. Review this account to see if you have recorded purchased assets as expenses in error. Generally purchases of over $500 should capitalized as a fixed asset and written off over a period of years.
Impact: Moving an expense to a fixed asset account will increase net income for financial reporting purposes. The same asset purchased can likely still be fully expensed for tax purposes making this an optimal adjustment to make. (There are cases where you will have differences between your tax- and book-basis income.)
Accounts Payable. Review the list of unpaid invoices in your accounts payable aging report. Be sure you have captured any amounts due for items that have been received but not invoiced. There may be supplies or inventory items that have been added to your shelves before you are billed. These costs need to be added as adjustments to your Accounts Payable liability account and recorded against the proper expense or asset account.
Impact: Generally increasing your accounts payable balance will increase an expense account, which reduces your net income for both book and tax purposes, but it depends on the nature of the item.
Payroll accounts. Review your payroll accounts to ensure that you have recorded gross pay as an expense and have added any employer taxes as payroll tax expenses. Also consider any bonuses that will be accrued or paid before the end of the year.
Impact: Adjustments that increase your payroll expense will reduce your net income. Tax requirements for deducting accrued expenses can differ from book treatment. We are happy to discuss your specific situation.
Now is the time to print out your financial statements, look for any unusual items, and make adjustments as needed. We will be happy to assist you in understanding your specific results and making any adjustments you might need before year-end.