Closing the Law Firm Client's Books at Year End
There are several tasks I like to accomplish for my clients at the end of the year, aiming to organize their files. December is the month that usually entails a period of tidying up. I aim to ensure that my existing clients' files are as prepared as possible.
Considering we are entering Q4, attempting to complete everything within a few condensed work weeks can be quite hectic. Time will pass swiftly. Consequently, now is an excellent opportunity to review the complete file of the client for the entire year.
Begin the year-end financial review by accessing your accounting software, such as QuickBooks, to review transactions. Identify any transactions lacking vendor or payee names and ensure all transactions have been properly recorded. This step sets the foundation for accurate bookkeeping and streamlines the tax preparation process.
In the past, we delved into the feature of book review. I won't delve into this further, but you can access last week's blog post by clicking here. I highly recommend initiating the review within the book review section using QuickBooks.
Balance Sheet Analysis
Inspect your accounts to identify anything that appears in the incorrect column. By this, I mean that if you notice an asset with a credit balance or a liability with a debit balance, there is likely an error. Negative balances may also be observed. Unusual balances often serve as a warning sign that something is amiss.
Examination of Payroll Liability Accounts
Scrutinize your payroll accounts and verify the balances. If you utilize QuickBooks Full Service payroll, the balances should be accurate, but it is prudent to double-check.
If your law firm utilizes QuickBooks payroll, check your payroll settings to ensure accurate categorization of wages and benefits. For S-corporations, separate wages from those of other staff members for accurate reporting. Segregate benefits and life insurance expenses to facilitate precise financial reporting.
Assets/Depreciation and Prepaid Accounts
For businesses with depreciating assets, accurately record and depreciate their costs over time. Attach corresponding receipts to high-ticket item purchases exceeding $2,500 in QuickBooks. This documentation will facilitate the assessment of depreciation schedules by tax accountants.
If you have been entering your depreciation manually, also consider examining these balances. I have observed instances where individuals continue to input depreciation data based on what the accountant recorded in previous years. They memorize it to perpetuate indefinitely. However, if the asset's useful life has expired, a negative asset balance will be apparent. Once again, seek guidance from your tax professional. If you have last year's tax return, you can reconcile the books with the tax return.
Accrual-based firms should carefully review prepaid accounts, such as insurance premiums, to ensure accurate balance figures. Properly accounting for prepaid items enhances financial accuracy and facilitates tax reporting.
In the case of Prepaid Accounts, the insurance bill is paid through a few larger payments. It is important to note that the insurance policy period may not align with the calendar or fiscal year. To properly account for this, the total insurance bill should be divided into monthly expenses through a journal entry. It is common to see customers entering the entire amount in the insurance expense category. However, if the insurance period extends from, for example, 8/1/23 to 8/1/24, it is not correct to expense the entire payment in 2023 as 8 months of coverage belong to the 2024 fiscal year. It is worth mentioning that if the books are maintained on a cash basis, the entire amount would be expensed in the year of payment.
Reconciling is crucial for customer deposit accounts to ensure any unearned income is properly accounted for. Additionally, a monthly reconciliation of IOLTA or Trust Liability is mandatory. A thorough 3-way bank reconciliation is required for accuracy.
Loans or Mortgages, and Credit Card Balances
When dealing with Loans or Mortgages, as well as Credit Card balances, there is a common mistake of entering the entire loan payment into the loan account (liability) without accounting for the interest expense. It is important to assess if loan payments are correctly broken down. A loan payment check entry should consist of multiple line items including the loan account, interest expense, and applicable escrow. It is important to remember that a loan itself is never an expense, only the interest portion is. Reconciling this account is also necessary for accuracy. It is recommended to attach the loan statement, which verifies the year-end balance, for the accounting professional's reference in the final month of the year.
Credit Card Balances often present a similar issue. It is advisable to ensure the accuracy of credit card account balances. If there are sub-accounts, reconciling the parent account may result in the correct total, but individual balances could be off. It is essential to break down the payments by sub-account to maintain accuracy.
Profit and Loss Analysis
Compare the prior year’s records with the current year. Look for negative balances and look for trends.
Reviewing year-end financial records is crucial for maintaining accurate records and streamlining tax preparation processes. By following these essential steps, businesses and law firms can ensure tidy, reconciled books and set a solid foundation for a successful year ahead. If you encounter complexities or uncertainties during this process, it is always beneficial to consult with a bookkeeper or tax professional. Prioritizing accurate financial management will help you make well-informed decisions and achieve financial success in the upcoming year.