The Year End Financial Checklist for Your Business

A structured year-end financial process provides clarity and strategic foresight. By methodically organizing financial records, a business ensures the accuracy of its data, which is foundational for tax preparation and compliance. This systematic approach simplifies interactions with tax authorities and yields insights into the company’s performance. These insights empower owners to make informed decisions, setting a stable course for the upcoming year.

Reconciling and Verifying Accounts

Bank and Credit Card Reconciliation

The process begins with bank and credit card reconciliation, comparing every transaction in the company’s accounting software with the corresponding entries on bank and credit card statements. Any discrepancies, such as unrecorded bank fees, duplicate entries, or outstanding checks that have not yet cleared, must be identified and investigated. Correcting these errors involves making adjusting entries in the accounting records to align them with the bank’s records, providing a verified cash balance.

Accounts Receivable (A/R) Aging

Next, attention turns to the accounts receivable aging report, a tool for managing cash flow. This report categorizes all outstanding customer invoices by the length of time they have been unpaid, typically in 30-day increments like 0-30 days, 31-60 days, and so on. Reviewing this report allows the business to identify which customers are late with their payments and prioritize collection efforts.

For invoices deemed uncollectible, they may be written off as bad debt. The ability to deduct this bad debt for tax purposes depends on the company’s accounting method. Businesses using the accrual method, which record income when earned, can deduct the loss, while businesses using the cash method generally cannot because the income was never recorded.

Accounts Payable (A/P) Aging

Similarly, the accounts payable aging report must be reviewed to ensure all liabilities are accurately recorded. This report lists all unpaid bills from vendors, categorized by their due dates. The goal is to verify that every invoice received has been entered into the system, that payments are scheduled appropriately to maintain good vendor relationships, and that all expenses for the year have been captured for an accurate profit and loss statement.

Inventory Count

For businesses that hold inventory, a physical count at year-end is performed. This involves counting every item in stock and comparing the results to the inventory management system. Adjusting entries are then made to account for discrepancies due to shrinkage, which can result from damage, theft, or obsolescence. The value of the ending inventory is then calculated using a consistent valuation method, such as First-In, First-Out (FIFO) or weighted-average cost.

Fixed Asset Schedule

The fixed asset schedule, which lists long-term assets such as buildings, vehicles, and equipment, requires a review. This task involves updating the list by recording any new assets purchased and removing any that were sold or retired. A part of this process is calculating the annual depreciation expense for each asset, which accounts for the wear and tear or obsolescence of the asset over its useful life. This non-cash expense is recorded on the income statement and reduces the book value of assets on the balance sheet.

Managing Payroll and Vendor Filings

A separate but important task is managing compliance for employees and independent contractors. This involves verifying information and processing final payments to ensure data for year-end tax forms is accurate. The focus is on preparatory steps taken before December 31st, as the actual filing of forms occurs in the new year.

Final Payroll Run

The last payroll of the year must include regular wages and any year-end adjustments like bonuses, commissions, or expense reimbursements. Processing these payments within the correct calendar year is important for accurate reporting of employee earnings on Form W-2.

Employee Information Verification

Before final payroll data is used for tax forms, verify the accuracy of all employee information on file. This includes confirming the correct spelling of names, Social Security numbers, and current mailing addresses. Inaccurate information can lead to the rejection of W-2 filings by the Social Security Administration and create issues for employees when they file their personal tax returns.

Contractor Information and Payments

Attention must also be given to independent contractors. Review the total payments made to each contractor, as anyone who received $600 or more for services must be issued a Form 1099-NEC. To do this, the business must have a completed Form W-9 on file for each contractor, which provides their legal name, address, and Taxpayer Identification Number. It is a best practice to collect a W-9 before any payment is made to a contractor.

Analyzing Financial Statements and Tax Planning

Financial Statement Review

The primary tools for analysis are the year-to-date Profit & Loss (P&L) statement and the Balance Sheet. The P&L statement reveals profitability by summarizing revenues, costs, and expenses, with key metrics to examine including revenue growth compared to the prior year and net income. The Balance Sheet provides a snapshot of financial health, detailing assets, liabilities, and equity, which can highlight changes in debt or the company’s net worth.

Strategic Tax Planning

The insights from the financial statement review inform year-end tax planning. If the P&L shows high profits, several strategies can be implemented before year-end to manage the tax liability.

• Making deductible contributions to employee retirement plans, such as a SEP IRA or Solo 401(k).
• Acquiring and placing new equipment in service to take advantage of depreciation rules. For assets placed in service in 2025, bonus depreciation allows for a 40% deduction of the asset’s cost in the first year.
• Selling investments at a loss to offset capital gains realized during the year, a strategy known as tax-loss harvesting.

Finalizing the Books and Preparing for the New Year

Making Closing Journal Entries

The first step in finalizing the books is to post all necessary adjusting and closing journal entries. These entries are required for accurate financial reporting under the accrual basis of accounting. Key adjustments include:

• Recording the annual depreciation expense from the fixed asset schedule.
• Writing off uncollectible accounts receivable.
• Adjusting the inventory accounts to reflect the results of the physical count.

Closing the Accounting Period

Once all closing entries are posted, formally close the accounting period within the company’s accounting software. This action “locks” the books for the completed fiscal year, preventing any accidental edits or additions to the data. This is a control measure that preserves the integrity of the historical financial records, ensuring reports remain consistent for future use.

Generating Final Reports

With the books officially closed, the final set of financial reports should be generated and securely saved. This package includes the final Profit & Loss statement, the Balance Sheet, and the Statement of Cash Flows. These documents should be distributed to stakeholders such as owners, investors, and lenders, and archived for historical record-keeping.

Developing the New Year’s Budget

The final step is using the compiled information to build a budget for the upcoming year. The finalized P&L statement provides a clear baseline of revenues and expenses, while the balance sheet offers insight into the company’s resource structure. This historical data allows for the creation of a realistic financial plan to guide decisions in the new year.