Many small business owners started the businesses on their own or with minimal staff strength. Usually, the major focus of the businesses is on revenue generation and leaves the function of transactions record keeping and accounting to inexperience staff. Many business owners leave it aside until the end of the financial year or when the deadline of accounts submission to the authorities coming close. The accounts and financial statements of the business entities are prepared once a year. Please take note that this practice of recording transactions once a year is definitely not encouraged and may even contravene the law imposed on businesses in some countries with the owners unaware of this. Depending on how the accounting documents are filed and kept, the accounting personnel assigned the task of preparing the accounts and the financial statements once a year may face the following three scenarios: –
First Scenario – The worst case scenario
The owners have little or no knowledge of accounting and transactions record keeping. No accounting records or transaction records listing kept. No separate recording of receipts and payments made. All the accounting documents including receipts, invoices & etc are probably not kept in files and in a mess. Personally, I have seen cases whereby all these source documents were just being thrown into a big box throughout the whole financial year! It puzzles me how these business owners monitor the daily cash flow position of the business operations. Many of them have to rely on constantly checking the bank account balances before payments are made or just relying on the fact that the bank account are allowed to be “overdrawn” because of overdraft facility. However, bank balances obtained from banks at any particular point in time do not necessary provide a reliable bank balances of the business available for use because of unpresented cheques and uncleared deposits. In addition, allowing unnecessary utilisation of overdraft facility is actually a waste of money for the business. This is a nightmare for the accounting personnel!
1. Sorting of documents
The first step is to sort all the accounting documents by types and in chronological order.
2. Identify and recover missing documents
Identify any obvious missing documents and take action to get a copy.
3. Key-in transactions in the accounts
Start with the cheque butts and bank statements by entering transactions into the cash book and the relevant accounts in the general ledger. Since there was no recording of transactions throughout the whole financial year, it serves little purpose now if you chose to record the transactions the conventional way to the books of original entry (Sales day book, purchase day book & etc) and then posts the transactions to the general ledger. However, it is good if you decide to do it the conventional way.
Important point: Key in or record the transactions MONTH BY MONTH. After the transactions of the first month have been completely recorded, prepare a bank reconciliation statement BEFORE you move on to the next month! This is important because if you proceed straight to key in all the transactions of the whole financial year in one go into the accounts, you still need to ensure that the bank balance reflected in the accounts as at the end of the financial year does in fact tally with the bank balance reflected on the bank statement (To prepare a bank reconciliation statement). Can you imagine what would happen if the reconciliation does throw out unreconciled differences? You have to go through all the transactions for the whole financial year (Both the entries recorded in the cash account and also the transaction entries reflected on the bank statements) and match each and every of them! By keying in transactions month by month and perform bank reconciliation also month by month, you are actually dividing this gigantic task into small parts and definitely much easier to manage and complete!
4. Further Adjustments
After all the entries have been recorded and reconciled to the bank statements, you still need to perform the following tasks before closing all the accounts and proceed to preparing the balance sheet and income statement: –
a. Credit transactions
Identify all bills, and invoices both for sales and purchases in which the transactions have occurred as at THE END OF THE FINANCIAL YEAR, but still have not been settled or paid. Go through all the invoices or bills settled or paid after the financial year and also all the unpaid or unsettled bills or invoices on hand. The criteria to determine the occurrence of transactions is usually based on the delivery and acceptance of goods and completion of services and NOT on the billing date as reflected on the invoice! Once you have completed this task, a listing of trade debtors, trade creditors, other debtors and other creditors should have also been compiled. Use journal entries to record and post these credit transactions in the respective accounts in the general ledger.
b. Year End Inventories or Stock Balance
The financial year end inventory balance is required to be ascertained. Usually, it is a required practice to conduct a year end stock counting exercise, and depending on the type of the business entities, if the financial statements of the business entities are subject to statutory audit requirement, the auditors should be informed of the stock counting date and be invited to observe the stock counting exercise. However, if the transactions record keeping of the business entities is in such a poor state, usually stock counting exercise at year end is also unlikely to have been conducted. Depending on the nature of the business entities, the task of identifying year end stock balances could be taking a lot of time and effort or just a simple and easy task. If the business is a service provider, no stock balances! If the business is selling only one type of goods, it is still fairly easy to identify the stock balance by way of identify the goods that have been purchased during the financial year (especially towards the end of the financial year) and SOLD in the NEXT FINANCIAL YEAR. Also identify those goods purchased during the financial year and remained unsold at the time of preparing the accounts. Of course if the stocks are beyond the usual stock holding period, the reason why the stocks are still unsold and any write down or write off required is the next issue to consider. However, if the business sells many different types of goods and also the volume of the businesses is large, this is a very time consuming task! Once the year end inventories or stock balance is ascertained, use journal entries to record the balance in the accounts.
c. Prepayment and deposits (balance sheet accounts with debit balances)
If all the prepayment and deposits have been calculated accordingly during the stage of keying in transactions into the accounts in the general ledger, it is of course no longer necessary to consider this. However, if there were no effort spend to calculate them before, you would now required to identify the possible prepayments and deposits which have most likely been recorded as expenses in the income statement items account and do the necessary adjustments by way of journal entries to recognise these items as balance sheet items.
5. Closing accounts and prepare trial balance, balance sheet and income statement
Once the above steps have been completed, it is time now to prepare the trial balance, balance sheet and income statement.
Second Scenario – Moderate cases
Accounting documents are filed by types and in chronological order. No cash book maintained but a listing or book that is used to record and describe each receipt and payment is maintained. In a way, this serves the role or cash receipts journal and cash payment journal.In this scenario, Step 1 and 2 described in the First Scenario are not necessary because the transactions record keeping are organised and in order. However, you need to go through the receipts and payments listing and segregate all the transactions into the respective types or groups and compute the total of each type or group of the transactions in accordance with the general ledger accounts items. You just need to post the total of each type or groups of transactions by way of journal entries the cash account and the respective general ledger accounts. Again, this should be performed month by month and also ensure the bank reconciliation is also performed month by month. After this, perform the tasks described in Step 4 and Step 5 of the First Scenario.
Third Scenario – Organised and Good Transactions Record Keeping
Cash book is used to record all receipts and payments and proper columns in the cash book are used to record each type of group of transactions in accordance with the accounts items in the general ledger. In these cases, the total of each column in the cash book is readily available at the end of each month. Most likely the monthly bank reconciliation statements are also prepared. You just need to record the total of each column in the cash book in the general ledger using journal entries. After this, perform the tasks described in Step 4 and Step 5 of the First Scenario.
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