Bookkeeping – Accounting Cycles (Lesson 29)

The bookkeeping cycle is like a huge giant clock with several dozen gears from a multiple cog gear rotating the most frequently turning cog cascading into the one large gear that once turned changes the timer one year forward. The bookkeeper’s job is to make all the gears click and keep the system lubricated. At the end of the year, hopefully the final gear moves one click on time and the process starts all over.

There is no one cycle in bookkeeping. There are at least nineteen different cycles involved. The bookkeeper is instrumental in all of them. Some cycles are farmed out to outside firms such as payroll processing or year-end schedules to a CPA firm. But overall, the bookkeeper is primarily tasked with these duties.

The following are respective cycles in summary format through the various stages to successfully close out an entire year. Each of the respective functions are covered in greater detail in a separate lesson in this section of bookkeeping.

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Daily Activity

There are three daily activities performed by the bookkeeper. Two address interactions with outside parties while the last function is mostly a monitoring requirement.

Bills

Each day every business purchases materials and labor from third parties. This information is entered into the accounting software. A well structured system has all bills flowing to the bookkeeper daily from three sources:

Mail
Receiving (Shipping/Receiving or from field personnel)
Management Purchases (hand tickets)

Invoicing

Invoicing includes traditional creation of invoices and the physical processing of the documents. In addition it includes the recording of the prior day’s sales. For retail this function includes the reconciliation of the cash register tills and the corresponding forms of payment. If customers pay via mail or call and pay via credit or debit; the bookkeeper is generally responsible for this activity.

Cash Monitoring

In addition to making the physical deposits it is the job of the bookkeeper to verify deposits each day by bank account review (online). While reviewing the activity stay aware of any abnormal activity such as bank fees. Undocumented withdrawals, tax payments etc. When these occur follow up to confirm proper authorization and create the necessary source documentation and entry into the books of record.

Weekly Activities

For most small businesses the weekly requirements are pretty straight forward. Since cash is essential for business, collecting money from customers for receivables is a de facto necessity. In some cases this is necessary ever day.

Secondly the bookkeeper should conduct a bank reconciliation and report expected sources and uses of cash during the next week of activity.

A third activity is the disbursement of monies for bills and subcontractors. If the small business does this daily it can create some timing issues and overall inefficiency.

In some cases running a payroll is a weekly activity too. Most small businesses pay every two weeks. But the goal is to receive time cards two to three days from actual payday to allow time to enter the time, confirm information, correct errors and issues, cut checks and get the owner’s signature.

Other weekly activities include production reports, retail reconciliation, shipping/receiving adjustments and issuing purchase orders. Most of the daily and weekly activities relate to the day-to-day needs of the company.

Monthly Activities

The monthly requirements can take upwards of a couple of days depending on the nature of the business. Those larger operations with sales of $1 Million or more per month will take more time than the $100,000 per month business. But the activities are relatively the same. First there is payroll closing; then the respective schedules and general ledger entries. Next the respective reconciliations are performed along with the trial balance review. Finally, the interim financial statements are printed for management. The following is a summary of each step.

Payroll Closing

Payroll monthly requirements include reconciliation of all tax entities which include:

Federal Income Taxes
Social Security and Social Security Matching
Medicare withheld and Employer Match
FUTA and Payments if Applicable
SUTA and Payments if Applicable
State Income Tax Withholding

In addition to reconciling, payments are issued.

Schedules and G/L Entries

There are many schedules associated with small business. The following is a short list:

Bank Reconciliations
Inventory Adjustments
Uncollectible Receivables
Project Progress Reports
Depreciation
Amortization
Loan Amortization (Debt Service)
Accrued Payroll (Vacation and Sick Time)
Credit Card Reconciliation
Advances and Shareholder Advances
Tax Obligations
Dividends/Distributions/Draws

Each of these create general ledger entries for posting of adjustments and recurring items.

In general a bookkeeper doesn’t close their doors and focus on theses at the end of each month. What happens is the bookkeeper updates and reconciles one or two of the schedules each day in addition to their daily requirements.

Reconciliations

When most business people hear the word reconciliation they think bank reconciliation. Actually, there are a lot of other types of reconciliations. Each month the respective vendor accounts require reconciliation to that vendor’s customer statement. On the flip side, bookkeepers send out customer statements or job progress reports. Therefore reconciliations are not limited to simply bank activity.

Trial Balance Review

Your better bookkeepers print a trial balance and check each account one by one to verify balances are of the correct type (debit or credit), located in the right type of account, and organized appropriately. Most importantly, the aggregate totals of debits and credits are equal. For a more advanced understanding read: Trial Balance

Interim Financial Statements

Once all the above monthly steps are complete, it is time to print the interim financial statements. I would always print one set for mark-up with side notes so if any questions arise I will have the answer right in front of me. Once satisfied with the reports, the final set is printed for distribution to management.

Quarterly Activities

Absolutely the most important quarterly requirement is the federal 941 report. It is essential that this report is accurate to the penny. The quarterly 941’s are used in summation to generate the annual payroll reports. Other quarterly payroll reports include FUTA reconciliation, SUTA reconciliation and report filing. Most states require an income tax withholding reconciliation report too.

In addition to payroll quarterly reports, management is customarily interested in performance reports. Although these reports are generated by department heads, the source information is typically under the control of the bookkeeper. The bookkeeper is asked to print customized reports for use by the department heads.

Year-End Closing

The most complex procedure to complete at year-end is payroll closing. In addition to the standard 4th quarter reports, a bookkeeper must complete the annual payroll reports. There are several articles explaining this process in the Taxes and Compliance tab, then click on Employment Taxes. This year-end process for payroll includes completion of the following:

Form 940 – FUTA
Forms W-2
Form W-3
Annual State Income Tax Withholding
Forms 1099-M
Form 1096
Form 945

Once payroll and vendor payment reports are completed it is time to reconcile each current asset and liability account. This is normally a function of your monthly closings and if performed correctly for December there is no need for a final set.

Other year-end closing steps include:

Communication with the tax preparer about purchase and disposal of fixed assets during the year. The end result is a tax depreciation schedule forwarded to the bookkeeper.
Generating copies of source documents for the tax preparer with ending account balances.
Generation of the following schedules:
- Tax Adjustments
- Capital Account Summary
- Tax Calculations
- Notes for Important Issues
Enter all general ledger adjustments and post to the respective ledgers.
Generate a working trial balance.

Summary – Economic Cycles

Each of the respective activities of the bookkeeper are little steps that build into one final leap into a new accounting year. There are a multitude of cycles to complete an annual rotation of accounting for a business. The bookkeeper is the main drive mechanism to initiate, run the respective cycles and finally ticktock its midnight; then a new cycle starts all over. Act on Knowledge.

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