Inconsistencies in tax returns are a gateway to receiving an Identification Request for Documentation (IRD). This can lead to greater ramifications like an IRS audit. Fortunately, this can all be easily avoided by simply being up to date with your bookkeeping. Poor bookkeeping health, such as failing to track business expenses or mixing personal and business funds, are red flags that arise during tax season or during audits.
One of the best ways to avoid errors in bookkeeping is to keep an organized, consistent, and detailed checklist. A checklist is especially useful for managing bookkeeping in small to medium-sized businesses because it can be easily customized as the business grows.
This blog serves as a checklist for businesses to maintain accurate bookkeeping and ensure integrity of financial records.
Checklist for maintaining Bookkeeping Health for Taxation and Audit Purposes
Maintaining a bookkeeping checklist involves conducting an internal evaluation of business operations. The following section presents a time-based, actionable, segmented approach to creating a bookkeeping checklist:
Daily/Weekly Bookkeeping Checklist
Have all incoming and ongoing transactions been accurately recorded by the end of each day?
Correctly recording all transactions ensures not only proper accounting but also shows transparency in all daily business operations. Most small businesses use the cash method rather than the accrual method of accounting, so accurate cash flow both coming in and out is the best and most effective means of maintaining a healthy accounting system.
Have all associated receipts been scanned and securely saved for all transaction processed during the day?
Accurate documentation is necessary to verify transactions and for audit purposes. All transactions should have sufficient detail to be retraced and validated to ensure the integrity of financial reports and compliance with regulatory requirements. Complete documentation also enables auditors to provide timely, organized supporting documentation for all financial activities, thereby simplifying the audit process.
Invoices must be classified using one of three different classification methods:
- the nature of the transaction
- the supplier
- the period they are associated with
After they are categorized, recorded invoices should be reviewed and updated regularly to avoid errors and meet payment deadlines. Regular review and update of recorded invoices will help businesses keep on top of their cash flow and meet their financial reporting requirements.
Are you reviewing cash flow at the end of every day?
Monitoring daily cash receipts and disbursements gives you a complete view of every financial transaction that your organization engages in. Monitoring cash flow on a daily basis not only gives you a better understanding of how much cash comes in and out of your business but also allows you to analyze past and expected trends in cash flow. In addition, daily cash flow management helps organizations detect any cash surpluses or shortfalls much faster so they can make timely decisions about maintaining their liquidity. Once an organization knows what its cash surpluses or shortfalls are, it can then make proper and timely finance decisions to enhance its cash management and financial viability.
Monthly Bookkeeping Checklist
Have all the bank statements been reconciled with the recorded financial statements?
To ensure accuracy of their records, businesses can avoid problems by reconciling bank statements each month, with their financial record keeping in mind. Business owners also have sufficient time and resources to correct any discrepancies found during monthly bank reconciliation. Because of this, bank reconciliation can be very useful for business owners when trying to project future cash flows.
Do all entries in the Profit and Loss statement correspond accurately to those in the Balance Sheet?
It is good practice to check that the net income shown in the profit and loss statement agrees with the movement in equity shown on the balance sheet on a regular basis, as any discrepancies between these two statements may indicate an error that will impact, potentially, the accuracy of the company’s income, which may then impact on its liabilities for tax/or audit purposes. Therefore, examining both the profit and loss statement and the balance sheet can help to ensure that the company is providing accurate and clear communication of their financial position and performance to HMRC.
Are there any remaining tax payments associated with each payroll?
Every payroll cycle comes with tax obligations, including payment obligations. Payroll-related taxes will not be submitted on the same date as the employee’s payroll; therefore, there is an increased risk of errors or nonpayment of these taxes.
Do the inventory records match the actual stocks?
Due to human mistakes, theft, and system malfunctions, actual stock levels regularly differ from records held in the company’s inventory system. Therefore, regular reconciliation of stock records to actual stock levels is imperative. By implementing a scheduled inventory review (such as cycle counting) to verify that inventory levels are accurately reflected in the inventory management system (or perpetual inventory system), businesses can reduce stockouts, reduce theft, and improve order fulfillment accuracy.
Quarterly/Yearly Checklist
Have all of the quarterly taxes been paid, recorded, and reviewed?
Before tax season, businesses must confirm that all of their quarterly tax payments have been made on time, with proper documentation, and have been checked for accuracy. Completing these tasks helps businesses track their tax obligations in a timely manner, avoid penalties, and remain compliant. Additionally, businesses will be prepared for the purpose of audit.
Have all of the appropriate tax documents been physically and digitally recorded and stored?
According to Publication 538 and Topic 305, the IRS specifies specific retention periods for different types of records. Typically, all tax-related documents must be retained for at least three years after their filing. Depending on the type of tax, the expiration date can extend to years or, in some cases, be indefinite.
Have all of the contractors been issued Form 1099-NEC?
To report any payments made to independent contractors, freelancers, vendors, and other service providers that exceed $600, businesses must complete and submit Form 1099 to both the IRS and the service provider in question to ensure each payment is being accurately reported as income, and to ensure that the customer does not underreport their income as a result of receiving the payment.
Have all employees received their annual W-2 forms?
Ensure each employee receives their W-2 and understands that it’s an accurate reflection of the employee’s gross and net compensation. Employees must understand their filing requirements and the IRS deadlines to avoid penalties, which is often mentioned in the W-2 forms.
Was the inventory status finalized in the books?
Prior to implementation of accounting software, it is necessary to conduct a comprehensive review and verification of the inventory records, ensuring that they are an accurate representation of the number of items on hand. Once the inventory records have been completely reviewed and all entries have been determined to be accurate, complete and current in order to ensure accurate financial statements. A complete review of inventory records will provide an accurate, and reliable overview of beginning inventory levels, which will lead to improved financial planning and decision-making at the beginning of the fiscal year.
Are there any loan verifications that are pending?
To ensure all loans are properly verified and/or confirmed, please verify that this remains the case for any remaining loans that need to be verified or confirmed to ensure the accuracy of the financial records. Financial Records are used by businesses to determine financial liabilities and current and future commitments (ongoing commitments), which are required to make sound decisions and comply with regulations. Additionally, confirming the outstanding loan verification status will ensure there are no delays in processing the loan and maintain the integrity of financial reporting.
Have all of the statements in the books been reconciled?
Reconcile thoroughly to confirm that all account balances and all financial statements have been reconciled thoroughly so you can find errors and fix them.
Reconciliation means comparing your internal records with external records (e.g., bank accounts) to verify accuracy. This is important so you can identify any additional errors, avoid fraud risks, and ensure the financial data you report to others is complete and accurate. In addition, when the same amount is in two or more sets of financial statements, the IRS is likely to audit you if it receives notice from the business about the duplicate amounts.
Are there potential remaining tax deductions or credits?
Review your business documentation for potential remaining tax credits and deductions including all miscellaneous revenue or expenses that you may not have recorded yet because if you did not report something that could qualify for a tax benefit, you could get a tax credit added to your total taxes which will reduce your overall tax liability. In order to determine whether you have other qualifications for tax benefits or to be eligible to receive a tax refund on your taxes, review in detail all of your income and expenses related to business. Make sure to identify types of activities that would qualify as business expenses in order to receive the maximum benefit from any potential tax credits or as many tax deductions that apply to this area of your business.
By utilizing deductions and credits efficiently you will minimize the amount of taxes owed to IRS and therefore alleviate any cash flow challenges your business may have due to tax obligations as well as compliance with IRS’s regulations concerning audits.
Conclusion
When using checklists that outline important accounting tasks (e.g., recording a transaction), companies can expand their financial records beyond merely creating additional records. One of the main benefits of a checklist is its ability to be tailored to the needs, industry, and complexity of the business. This provides a basis for scaling and adjusting a company’s financial functions, depending on how far it has progressed and/or how new problems have arisen, especially when preparing for taxation and audit. The result is improved accuracy, efficiency, and compliance across all levels of operational activities.
