Written by Stephen Beard, Managing Director of Plyo Bookkeeping, a Vancouver-based bookkeeping firm.

Christmas is nearly here, and in Canada, that also means that tax season is just around the corner. If you own a small business, then you know it’s nearly time to speak with your accountant. But for many people, especially those clients who do their bookkeeping, this can be a frustrating and sometimes confusing process. This article aims to clearly explain the Year-End Accounting tasks that your bookkeeper (or you if doing your books) will need to perform before your accountant can start work.

This article will also discuss what your accountant does at year-end, and what you should expect them to give you at the end.

Year-End Accounting-Overview

It’s a pretty simple order of operation. Nothing can happen on your year-end financials until the books are prepared, so that means either you or your bookkeeper needs to get the books fully completed up to year-end before being able to hand them over to the accountant. The accountant then reviews the books and proposes adjustments so that the books better reflect reality.

This is necessary because most small businesses record transactions on a cash basis, and sometimes this can miss information that would be essential for reporting and tax purposes. The accountant will then confirm that you’re happy with the adjustments before preparing your corporate tax return.

What does a bookkeeper do?

If you’re doing your books, you must understand a completed set of account properties, as this is the required detail of record keeping your account will expect to be completed when they start work on your year-end. Below are the key tasks that you or your bookkeeper should perform at year-end.

• Bank reconciliations. This seems simple but is the most common area for mistakes when people do their books. If you’re using a cloud-based accounting software like QuickBooks Online or Xero, then you’ll likely have live bank fees that are pulling in all of the transactions from your bank. You either match the transactions with sales or purchase invoices already in your accounting system or just book them directly to the relevant category. This process is simple, but this is not a completed bank reconciliation.
• The step missed here is that the closing bank balance in the accounting system was not checked and reconciled against an actual physical bank statement. Without performing this check we don’t know if the bank balance in the accounting system is correct. Bank feeds for Canadian banks are very prone to disconnecting, so transactions are often missing or duplicated. All banks in your accounting software must match the balance shown on your bank statements. Here’s a link to a QuickBooks Online article and video on how to perform bank reconciliations using their software.
• If you’ve been running a monthly or semi-monthly payroll, then you’ll want to make sure that your payroll software reports agree with what’s in your accounting system, and that the tax liability in your accounting system agrees with your CRA business account.
• Review your accounts and look through the underlying transactions. Recurring supplier payments should be coded to the same account, and this is a great opportunity to check that you haven’t missed any input GST on expenses that could be reclaimed.
• GST/HST and PST returns will need to be filed monthly, quarterly, or annually. For companies with revenue under CAD 1.5 million, it’s usually an annual filing that can either be performed by your bookkeeper or by your accountant.
• There are several adjustments that you or your bookkeeper could perform monthly, such as depreciation, inventory adjustments, accruals, and prepayments. For this article, I’m going to include them under the tasks a year-end accountant does, as this is common practice for smaller companies.

What does an Accountant do?

Your accountant will likely be engaged to prepare your year-end financial reports and corporate tax return (T2). They may also be engaged to complete your tax return (T1) and other ad-hoc filings.

There are different levels of financial reports that your account can provide. As we’re focusing on smaller businesses, I’m going to describe the most basic set of financial reports, where your accountant will only provide an adjusted trial balance, and they offer no review or assurance that the underlying figures are valid. Your accountant will start with the fully reconciled books and will then make a series of adjustments to make sure that the numbers in the trial balance accurately reflect reality. Many smaller companies record transactions as they appear on the bank statement, which may not be the correct treatment.

For example, an Amazon seller might record payouts from Amazon as sales. But this would only capture the net amount Amazon pays out and would miss critical information like the gross sales amount, Amazon fees, and the amount of sales GST/HST/PST collected. Recording information like this monthly might be too onerous for many smaller businesses, so this would be a prime example of a year-end adjustment your accountant would make. Other examples of year-end adjustments would be:

• Depreciation on assets like buildings, cars, furniture, and office equipment.
• Write off of bad debt on aged receivables
• Revaluation of foreign currency deposits as at the year-end closing exchange rate
• Addition of accruals such as the accounting fee and corporate income tax payable for the year
• Prepayment of expenses that relate to later periods (e.g. insurance paid for the year upcoming)
• Adjustments to inventory balance based on stock reports

When your accountant has completed your adjusted trial balance, you’ll normally be asked to review the proposed adjustments, so you can check that their adjustments seem reasonable. Once you’ve agreed on the adjustments with your accountant, they should then provide you with:

• Your adjusted trial balance as of year-end – these are the numbers used for the tax return preparation.
• A copy of the year-end adjustments – this is essential as you’ll need to post these into your accounting system so that your system shows the same numbers as the adjusted trial balance
• A copy of your corporate tax return (T2)

What does your Accountant expect?

If your accountant isn’t preparing your books, then this will be what they expect from you or your bookkeeper before being able to start their work:

• All sales and purchase invoices are posted and recorded in your accounting system
• All company bank accounts and credit cards reconciled up to year-end. That means that the closing balances in your accounting system match the closing balances per your bank statements.
• The previous year’s end in your accounting system needs to agree with your previous adjusted trial balance prepared by your accountant. Make sure that last year’s year-end adjustments were posted, and that the accounting system trial balance matches the previous adjusted trial balance.

Difference between an Accountant and a Bookkeeper

Bookkeeping is usually considered less technical than accounts preparation, but it’s more accurate to view it as a different skill set than year-end account preparation. Bookkeepers must have an in-depth understanding of an ever-increasing number of specialist software, and a good bookkeeper has a very good understanding of designing and implementing finance systems. Public accountants on the other hand are focused on preparing compliant year-end financial reports and income tax returns. They need to keep up to date with the latest tax law, but generally only deal with higher level reports from the accounting system.   

Conclusion

Bookkeepers and accountants have different roles. Your books must be properly reconciled and closed before your accountant can start their year-end work. Your accountant will likely need to make various year-end adjustments so that your accounts better reflect reality.  Bookkeeping can be a time-consuming process so it’s best to stay on top of it monthly.