Bookkeeping is usually associated with the record of money in and money out. However, bookkeeping also contributes to the evaluation of businesses to determine how far they have come, where they are, and also to plan for the future.
Meanwhile, it is common for business owners to experience lots of mess each day, which could be from backroom inventory overflows, errors in invoice preparation, and schedule problems, among many other types of mess. Note that these messes can bring about troubles, hassles, or even sleepless nights, and if left unattended, can destroy the business. Unfortunately, messes are part of things that cannot be avoided due to how small businesses are handled.
Even at that, bookkeeping and accounting records must not be part of the mess made in a company, seeing that having good data makes it easy to make informed decisions, and that is why it is essential to clean up bookkeeping records, keeping in mind that such presentable records are required for certain cases.
If the accounting records of the business are not in order to provide the guidance it is meant to do, investors who are interested in acquiring the company or partnering with it by investing become discouraged from doing so. Clearly, awful financial data can ruin an unfinished deal or even bring about fines from regulatory bodies.
Furthermore, getting a loan or qualifying for other government funds is impossible without a financial report, and for this, bookkeeping is necessary. Clean bookkeeping records are also essential for audits, as failure to make them available can delay the audit process.
Checklist To Clean Up Bookkeeping Records
There are, of course, some steps that need to be taken to present your financial statements in the best way that will aid the growth of your business. These steps are explained below:
- Check For The Problem: In a bid to fix bad bookkeeping, the most important thing to do first is to identify the problem in your accounting records before a formal audit is done. Businesses faced with messy bookkeeping records do not need to look far to know there are things to correct in their records, but businesses with little errors may find it hard to detect the problem or how to checkmate it.
Listed below are signs that there are issues with the company’s bookkeeping records:
- Unauthorized withdrawals
- Stagnant inventory levels
- Overestimation of assets
- Inconsistencies in cash balances
- Negative cash or credit balances
- Incomplete or inconsistent invoices
- Bank charges and penalties
- Errors in asset valuation and capitalization
- General ledger errors
- Changes in payment terms from suppliers
- Absence of retained earnings
- Lending institutions’ fees or penalties
- Disorganized business loan records
- Inconsistent depreciation of fixed assets
- Non-updated inventory level statements
- Excessive business expenses
- Unexpected interest charged on credit accounts
- Constricted terms of payment from suppliers
If any of these signs show up while doing a complete bookkeeping clean-up checklist, then there is a need for the business to clean up its bookkeeping records.
- Assess The Problem: After discovering the problem in the data, getting to know the cause of the issue can be challenging. While it is not mandatory to take the steps consecutively, the steps analyzed below are the general places to find the problems, and they are important to have properly audited financial records:
- Capitalize fixed assets: To avoid overestimation of the value of property, plant, and equipment (PPE), it is critical to follow a depreciation schedule, keeping in mind that fixed assets are meant to depreciate until they are obsolete.
- Compare retained earnings to tax returns: If the business does not have exact funds after paying cash to the owners, that is, if earnings and tax returns do not agree, there is a problem. Problems at this stage point to the current fiscal year.
- Account for other assets: Tangible and intangible assets should be adequately accounted for without delay. Note that all total assets must change over time and not remain the same, and when the asset balances are negative, there is a problem.
- Reconcile cash accounts: The actual cash flow is expected to match the bank records. There should be a monthly reconciliation for every active bank account, and if there are more accounts, the reconciliation should be more frequent.
- Verify inventory levels: Profits and losses must be properly separated from retained earnings in order to present an accurate picture of inventory levels available to the business. The inventory count highlights available things that can be changed into cash within a short period of time.
- Track inter-business loans: To avoid fraudulent activities, it is critical to treat businesses as separate entities, even if they are owned by the same person. If the cash movement between the businesses were handled as one, there would be a complicated account book.
- Reconcile credit card statements: Interest on lines of credit should be recorded as an expense, and transactions made against the account must be reconciled when there is a perpetual balance.
- Eliminate Further Damage: This clean-up checklist is actually the most overlooked guideline in having a proper record. After identifying the problem in the bookkeeping records, it is not advisable to get right on it to fix it without employing the service of a reliable accounting system under the watch of a certified bookkeeper.
In this case, especially in small businesses, it will be easy to know if the records can continue to be managed by the same person or through the same system, or if they should be assigned to an accountant. Keep in mind that as the business grows, the financial capacity also expands and demands more attention.
- Source Documents Management: While it appears organized to have different departments handling invoices, another taking charge of billing statements, and each department saddled with its own responsibility, it is much more important to centralize the management of the source documents and have a department or one person be in charge of distributing all source documents connected to finances, and once every document has been accounted for, a copy can be sent to where it should be.
- Scrutinize Each Problem: Once the management of the source documents has been centralized, problems in each document can be easily identified and tackled.
- Get A Clean System: After identifying and analyzing the problems, the next thing to do on the bookkeeping clean-up checklist is to build a new, complete, and accurate set of books. This can be made possible by entering every transaction accurately and totally into the new accounting software obtained for the purpose. Also, an accurate account book is built entry by entry, and while doing this, it will be easy to pinpoint the errors made in the previous book records.
Fortunately, generating a simple income statement will be made easier with the solid general ledger created from extracts of the older source documents, keeping in mind that a clean balance sheet requires accurate historical records.
- Assess The Cash And Credit Accounts: The bookkeeping clean-up checklist requires this process to have a total account clean-up. When the books are in order and a solid process has been established for receiving source documents and recording information, the next thing is to reconcile the cash and credit accounts. Check out the bank statements for previous transactions and spot-check the end-of-month balances for each period to know if there was a fallout, when, and how it happened.
While checking the balances, the two most important criteria to use in checking the information are:
- Each transaction must be verified against a source document.
- Every transaction should be cross-checked against the bank statements.
Bank statements are the basic records for account books and are crucial to the bookkeeping clean-up checklist.
- Solve Other Issues: After verifying the business cash flow against source documents, the next thing is to correct the issues that will help manage business taxes and present the true face of the business, such as;
- Appropriately valuing fixed assets
- Keeping track of all assets
- Ascertaining the inventory level
- Keeping track of inter-business activities
- Making a personal bookkeeping cleaning checklist
- Create New Financial Reports: Once the records have been cleaned up to the beginning of the current fiscal year, the materials needed to produce the most fundamental reports will be available. There will be an accurate balance sheet with basic sales and profit numbers. With this, a new general ledger can be created for the start of the fiscal year, and data for previously documented transactions can be entered or uploaded.
- Move to the Accrual Basis: Although this guideline in the bookkeeping clean-up checklist does not apply to all businesses, it is extremely important. Most of the time, small businesses hardly record sales or revenue and see no need for bookkeeping; they only record when there is a sale or cash is spent to cover some bills. However, the cash-basis accounting has no impact on project revenue, inventory levels, chasing down overdue payments, or even planning for capital investments.
When the business begins to expand, there is a need to move to the accrual basis of accounting. This method keeps records of transactions not just when cash is exchanged but at the moment it is committed through purchase contracts, invoicing, or related agreements. Every invoice gotten from a supplier or forwarded to a customer is entered separately, and that gives the businesses a clearer picture.
Conclusion
In conclusion, it becomes a necessity to seek help immediately after an issue has been identified because further delay can compound the problems and require extreme measures to solve them. It would be a great investment to employ the services of an accounting firm to fix bookkeeping problems in your business financial records to save time and reduce losses.