You know that your books are behind—maybe by a few months, or maybe the whole year needs attention. And you’ve been avoiding opening QuickBooks because you already know what you’ll find.
First of all, take a breath; this happens. We see it a lot with growing businesses that have been focused on serving customers, hiring people, making sales, and keeping the doors open, or nonprofits focused on mission delivery while grant reporting piles up. Accounting gets pushed to next week, then next month, and eventually tax season arrives with a pile of transactions nobody wants to deal with.
Being behind on the books doesn’t make you a bad business owner. It usually means your business has outgrown the financial infrastructure you had when you started. The good news is that you can fix it. Rather than thinking about catching up as a giant accounting project, approach the problem by working through it in the right order.
Why it’s important to prepare your books for tax season
The IRS says business records need to support the income, expenses, and credits reported on a return, and those records should include supporting documentation such as invoices, receipts, bills, deposit records, and cancelled checks. Your accountant needs all of these records to prepare your tax return.
But there’s another reason to get your books current, too: your financials are supposed to help you run the business. If your last reliable financial statements are from March and you’re making decisions in August, you have a five-month blind spot where you could be hiring based on a bank balance rather than actual profitability, or pricing products without knowing your true margins. Good accounting should tell you what happened and help you decide what to do next.
If your books are behind, here’s a step-by-step approach you can take to get back on track and prepare for tax season.
Step 1: Figure out how far behind you are
Before you start entering transactions, establish the actual size of the problem. Look at your accounting system and answer:
- What was the last month that was fully reconciled?
- Are your bank and credit card accounts connected?
- Are there unreconciled transactions sitting in the system?
- Have all income and expenses been recorded?
- Are accounts receivable and accounts payable current?
- Are payroll entries up to date?
- Are loans and other liabilities reflected correctly?
- Have owner transactions been properly classified?
- If you sell products, does your inventory information agree with your accounting records?
Step 2: Start with your bank and credit card accounts
Bank and credit card statements are often the best starting point because they give you a record of what actually happened.
Download the statements for every business account covering the period you’re catching up.
Then compare them with what’s recorded in your accounting system. You’re looking for:
- Missing transactions
- Duplicate transactions
- Unreconciled payments
- Deposits that haven’t been recorded
- Expenses sitting in the wrong account
- Transfers incorrectly recorded as income or expenses
- Personal transactions mixed into business accounts
- Old transactions that were never cleared
Step 3: Categorize and reconcile
Your accounts need to reconcile to the underlying financial records. The IRS says electronic records need to provide a complete and accurate record and be able to support and verify entries on the tax return. If your accounting system says the bank balance is $84,000, but your actual bank statement says $79,500, you have a problem to solve before you can rely on the financials.
Reconciliation helps uncover those problems. It also gives you a much better starting point for tax preparation because your tax professional is working from solid financial information.
Step 4: Check the accounts that are easy to overlook
Bank accounts get most of the attention during a cleanup, but several other areas can create problems.
Accounts receivable
Review outstanding customer invoices. Are they still collectible? Were they paid but never recorded? Are there old balances that need to be written off or investigated?
Accounts payable
Look for unpaid vendor bills and expenses that belong in the period you’re reporting.
Payroll
Make sure payroll transactions and related liabilities have been recorded correctly.
Loans
Check that loan balances agree with lender statements. Principal and interest need to be recorded correctly.
Fixed assets
If you bought equipment, vehicles or other significant assets, make sure they’re recorded properly and not buried in an expense account.
Owner transactions
Personal spending, owner draws, capital contributions and business expenses need to be separated so the financial statements tell the right story.
Step 5: Gather the documents behind the numbers
Your accounting system is only part of the record. You also need to pull together the invoices, receipts, bills, statements, and other documents that support your transactions. The IRS specifically identifies these supporting documents as part of a business’s books and records.
If you’re missing documentation, don’t immediately panic. Start with what you have, as bank and credit card statements, prior tax returns, accounting records, and other business documentation can help reconstruct missing information when necessary. The important part is to document how you arrived at the numbers. Don’t guess!
Step 6: Review the financial statements before handing them over
Once the transactions are caught up and reconciled, look at the actual financial statements.
- Start with the profit and loss statement and check that the numbers make sense.
- Look at the balance sheet: Are there old receivables sitting there? Does inventory seem reasonable? Are loan balances accurate? Are there strange negative balances?
Step 7: Give your tax professional clean information
Once your books are current, your tax professional has a much stronger foundation to work from. They may still have questions about deductions, assets, owner transactions, tax elections, or other issues, but at least you’re answering those questions from organized financial information instead of trying to reconstruct an entire year through email threads and bank statements.
What if your books are really messy?
Sometimes there’s more to catching up than spending a Saturday afternoon categorizing transactions. If your books haven’t been reconciled for a year, you’ve changed accounting systems, have multiple entities, have inventory, or have years of transactions that need attention, trying to fix everything yourself can create more problems.
Are you dealing with a backlog or an infrastructure problem? For example, if you’re constantly six months behind because nobody owns the accounting function, cleaning up December’s transactions won’t solve January’s problem, and you’ll be back in the same position next year.
Pillar handles accounting cleanup and remediation, system and process transitions, close management, and ongoing outsourced accounting support. The goal is to get the records into shape and then build a system that can keep them there.
Don’t let the cleanup become next year’s problem
Getting caught up feels good, but staying caught up is better. Once the backlog is under control, establish a regular close process. That might mean:
- Bank and credit card reconciliations each month
- Accounts receivable and payable reviews
- Payroll reconciliation
- Balance sheet account reviews
- Monthly financial statements
- A defined close deadline
- Someone responsible for reviewing unusual transactions
- Regular communication between accounting and your tax professional
You may also be interested in: Monthly bookkeeping checklist for growing businesses (free template)
Your accounting system should make this work easier
If you’re looking for help because your books are behind, you shouldn’t have to feel embarrassed before you can ask for it. Trust us, we’ve seen worse.
We approach accounting as a complete system. That means clean financials, the technology and workflows that support them, and advisory that helps you understand what the numbers mean. We can help with accounting cleanup and remediation, ongoing accounting, cloud accounting systems, workflow automation, integrations, and CFO-level insight into what the numbers mean so that you’re equipped to make better decisions.
The goal is straightforward: clean books, true margins, and cash flow clarity, so you can make decisions with information you trust.
Your books are behind, but you need to prepare for tax season. Now what?
Start by finding the last month you can trust, and then work forward systematically. Reconcile the accounts, investigate unusual balances, gather supporting documents, and review the financial statements before sending the information to your tax professional. And if the backlog is bigger than you can reasonably handle, get help.
If you’re ready to prepare your books for tax season and want to know what needs fixing first, let’s talk. We can look at where your accounting stands, what is getting in the way, and whether outsourced or cloud accounting support makes sense for your business.