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Tax Time: A Year-End Checklist of Accounting Tasks

by Bonnie Biafore, author of QuickBooks 2005: The Missing Manual

The typical workday is hectic enough, but the end of the year brings an assortment of additional bookkeeping and accounting tasks. Keeping on top of your bookkeeping throughout the year means you can delegate most of the year-end tasks to QuickBooks. (Though if you shrugged off your data entry during the year, even the mighty QuickBooks can't help.) Whether you handle your company's accounting on your own or hand off the major accounting tasks to an accountant, here are the tasks you'll typically want to complete shortly after the end of your fiscal year.

Link Accounts with Lines on Tax Reports

Whether your accountant has the honor of preparing your taxes or you keep that excitement for yourself, you can save accountant's fees and your own sanity by making sure your company file is ready for tax season. Before you try to use your QuickBooks company file to prepare your taxes, be sure to link each account in your Chart of Accounts to the correct tax line and tax form.

To see whether your accounts are associated with the correct tax lines and forms, choose Reports -> Accountant & Taxes -> Income Tax Preparation. QuickBooks displays a report showing every account, its type, and the tax line to which you assigned it, as shown in Figure 1.

Figure 1
Figure 1. If you see "<Unassigned>" in the Tax Line column, you'll have to assign a tax line to that account

To edit an account in QuickBooks to add the tax line, press Ctrl-A to display the Chart of Accounts. Select the account and press Ctrl-E to open the Edit Account dialog box. In the Tax Line entry dropdown list, choose the tax form for that account.

Tip: If you have no clue which tax forms go with which accounts, you can enlist QuickBooks' Easy Step Interview (covered in Chapter 1, "Creating a Company in QuickBooks," of QuickBooks 2005: The Missing Manual) for help. Run the Easy Step Interview with a bogus company name. Skip information such as address and phone number, but be sure to choose the income tax form that you use for your company tax returns and select a type of company similar to your business.

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QuickBooks 2005: The Missing Manual
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If you tell the wizard to create a chart of accounts, you can print that chart of accounts after you exit the interview to see which tax lines QuickBooks used. Reopen your company file and edit your accounts to assign the tax forms that QuickBooks used.

View the Trial Balance Report

The Trial Balance report is a holdover from the days of paper-based accounting. The name refers to the report's original purpose: totaling the balances of every account in debit and credit columns to see if they all matched. If they didn't, the bookkeeper had to track down the mistakes and try again.

QuickBooks doesn't make arithmetic mistakes, so you don't need a trial balance to make sure that debits and credits match. However, the Trial Balance report is the only place in QuickBooks that you can see all your accounts and their balances in the same place, so it's a great way to quickly scan every account balance for errors.

Generate Year-End Financial Reports

Preparing your company tax returns stimulates a frenzy of financial reporting, but tax forms aren't the only reason for year-end reports. It's a good idea to run year-end reports to look for numbers that don't seem right. You might have posted a deposit or payment to the wrong account or created a journal entry incorrectly. Financial reports are also helpful for analyzing your business performance.

Generate a Profit and Loss Report

Just as individuals receive W-2s to show how much money they made in a year, companies use profit and loss reports to show their net income for a given period. A profit and loss report shows income, expenses, and the resulting net income (or earnings.) Besides submitting a full-year profit and loss report with your company tax return, you can review the income accounts for products that aren't selling well or the expense accounts for ways to cut costs.

When you generate a profit and loss report in QuickBooks by choosing Reports -> Company & Financial -> Profit & Loss Standard, QuickBooks opens the Profit & Loss window, which contains a report for the current month to date. To change the report to a fiscal year report like the one shown in Figure 2, in the Profit & Loss window, in the Dates dropdown list, choose Last Fiscal Year if you generate the report after the end of your fiscal year.

Figure 2
Figure 2. In the Dates dropdown list, choose a period to generate a profit and loss report for that period

Tip: If you want to access a year-end profit and loss report more easily, memorize your year-end report as described in Chapter 14, "Working with Financial Statements," of the Missing Manual.

Generate a Year-End Balance Sheet

A balance sheet shows the assets (things you own) and liabilities (money you owe) for your company. A balance sheet report for the entire fiscal year accompanies your tax return.

Generating a balance sheet for a fiscal year is almost identical to generating a profit and loss report. Choose Reports -> Company & Financial -> Balance Sheet Standard. In the Balance Sheet window, in the "As of" box, type the last day of your company's fiscal year. QuickBooks adjusts the dates, and you're good to go.

Create an Accountant's Review Copy of Your QuickBooks Company File

If you work with an accountant who uses QuickBooks, there are times when a tug of war over your company file is inevitable. You want to perform your day-to-day bookkeeping, but your accountant wants to review your books, correct mistakes you've made, enter journal entries to prepare your books for end-of-quarter or end-of-year reports, and so on. With a QuickBooks accountant's review copy, you and your accountant can stop squabbling, because you can each have your own copy of the company file.

Your accountant can work on the accountant's review copy in the comfort of his own office while you continue to work on your company file. When your accountant sends the updated accountant's review copy back to you, QuickBooks makes short work of merging your accountant's changes into your company file.

To create an accountant's review copy, first be sure to switch to single user mode. The command is easy to figure out: File -> Switch to Single-user Mode. Then, choose File -> Accountant's Review -> Create Accountant's Copy. You can save the accountant's copy to your hard drive, CD, or even a floppy, if your computer still has one. After you save the accountant's copy, in the program window title bar, QuickBooks displays the words "Accountant's Copy Exists" immediately after the company name.

Tip: If you use a password on your company file (and it's an excellent idea, no matter how tiny your company), don't forget to tell your accountant the password for the QuickBooks administrator account.

QuickBooks locks parts of your company file when an accountant's copy exists, so both you and your accountant must live with a few minor restrictions. Most of the taboo tasks can wait during the few weeks that your accountant has a copy of your file.

While you're sharing the company file, you can still create, edit, or delete transactions, so your bookkeeping duties are unaffected. You can also add entries to lists or edit the information in list entries. Here's what you can't do until you merge your accountant's changes:

Despite the file's name, your accountant can do more than review in the accountant's review copy. She can:

However, your accountant can't delete or make inactive any entries on your lists (because you might be using them), and she can't create any transactions other than journal entries (to prevent problems with automatic transaction numbering).

When your accountant sends back your company file, the file extension changes from .qbx to .aif, which represents the file extension for an accountant's review copy data import file. To import your accountant's changes into your company file, choose File -> Accountant's Review -> Import Accountant's Changes.

Generate 1099s

In QuickBooks, paying independent contractors is no different than paying other vendors. You enter bills from your independent contractors and then you pay those bills. No messy payroll transactions; no fuss with benefits or other regulatory requirements. But at the end of the year, you do have to generate 1099s for your independent workers. Small companies that need only one or two 1099 forms can use a service such as Filetaxes.com to produce 1099s. You submit your 1099 information and they send out your paper copies and file your 1096 for you.

Even with a service such as this, you must track your 1099 payments (see Chapter 10, "Paying for Expenses"). If you set up QuickBooks to track 1099 payments and your contractors as 1099 vendors, you can review the amounts you've paid to 1099 vendors by choosing Reports -> Vendors & Payables, and then choose either 1099 Summary or 1099 Detail. The 1099 Summary report shows payments that you made to 1099 vendors through 1099 accounts, as shown in Figure 3.

Figure 3
Figure 3. To make sure that you didn't forget to mark a vendor eligible for a 1099, in the 1099 Options dropdown list, choose All Vendors

Create End-of-Year Journal Entries

Journal entries run rampant at the end of the year. If your accountant makes journal entries for you or gives you instructions, you might be perfectly happy not knowing what these journal entries do. But if you go it alone, you need to know which journal entries to make.

For example, if you purchase fixed assets, you must create a general journal entry to handle depreciation. You might also create journal entries so you can produce accrual- based reports from your cash-based books.

If this article explained all of the possible end-of-year journal entries, its mass might collapse it into a black hole. If you aren't an accounting expert, the cost of an accountant's services is piddling compared to time it takes to research your journal entry needs.

Close the Books for the Year

A few months after the end of a fiscal year, when tax returns rest comfortably under the gimlet-eyed scrutiny of the tax authorities, most companies close their books for the previous fiscal year. The purpose of closing the books is to lock the transactions for which you've already reported taxes or financial results, because the IRS and shareholders alike don't look kindly on changes to the reports they've received.

QuickBooks, on the other hand, doesn't care if you close the books in your company file. The closing task protects you from the consequences of changing the numbers in previous years (like altering the company file so that it no longer matches the reports you've provided to the IRS or your shareholders). But you're free to keep your books open if you're not worried about editing older transactions by mistake. If you do close your books in QuickBooks, the program still gives you a way to edit transactions prior to the closing date. Unlike other bookkeeping programs in which closed means closed, in QuickBooks, people who know the closing date password can still change and delete closed transactions.

Closing the books in QuickBooks takes place in an unlikely location: the Preferences dialog box. Figure 4 shows you how to close your books.

Figure 4
Figure 4. Choose Edit -> Preferences and, in the icon bar, click Accounting and then the Company Preferences tab. To close the books as of a specific date, in the "Date through which books are closed" box, type or select the last day of the previous fiscal year

Back Up Your Company File

After you've completed all your QuickBooks year-end activities, create a backup of your company file (see Chapter 7, "Managing QuickBooks Files,"). With all of the data that contributed to your financial reports and tax forms in this backup, you're not going overboard by creating two copies of the backup: one to keep close by in your office, and one stored safely offsite in case of emergency.

Bonnie Biafore writes about project management, personal finance, and investing. She's the author of Project 2007: The Missing Manual, as well as Online Investing Hacks, QuickBooks 2008: The Missing Manual, and Quicken 2008: The Missing Manual. Bonnie Biafore's blog can be found at http://projectsinpractice.com.

In February 2005, O'Reilly Media, Inc., released QuickBooks 2005: The Missing Manual.

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