How Often Should You Update Your Books?

 In Accounting, Business

All small business owners should have a set of books that record the business’s financial position, operating results, and cash inflows/outflows. For very small and extremely simple businesses, a spreadsheet might work. However, for the overwhelming majority of my small business clients (especially those organized as LLC’s and corporations) a spreadsheet will not cut it. 😊 QuickBooks Online, WaveApps, and Xero are the three most popular types of bookkeeping software that my clients use. Each of these software types has different features, but all of them can report a balance sheet, profit & loss (income statement), and a statement of cash flows. At a minimum, these are the three financial reports that small business owners should utilize to see where their business stands.

But once your accounting software is selected, how often should you update your books? Below are some factors you should consider.

Do You Aim to Use Your Books for Decision Making?

Though many small business owners would answer yes to this question, the reality is that many small business owners log into their bank accounts, rather than their bookkeeping software, for use in decision making. There are many reasons why, but many small business owners understand their bank’s website better than they understand their books. Additionally, some small business owners may only budget for bookkeeping help monthly, quarterly, or annually so their books are not necessarily reliable for real-time decision making. While it is great to log in to your bank accounts to see some aspects of financial performance, using electronic banking information alone (without also logging into your bookkeeping system) can cause misleading impressions about available cash, business income, and taxable income. If you aim to use your books for decision making, I recommend updating your accounting software at least weekly.

Will You Only Use Your Books for Tax Reporting?

There are some small business owners whose businesses have relatively routine transactions, their businesses are profitable, they have few liabilities (if any), and they have enough cash on hand where weekly bookkeeping may be unnecessary for them to make most decisions. In this case, I recommend that these business owners update their books monthly or quarterly. Books should be updated at least quarterly because estimated tax payments are due to the IRS and state departments of revenue at least quarterly, and it may be worthwhile to reassess or adjust estimated tax calculations based on actual results for the year rather than safe harbors that may have been calculated at tax time. Monthly is still optimal though because most accounting systems involve “bank feeds” where transactions automatically feed in from the bank to the bookkeeping system, and if too much time elapses these connections may become broken. When the bank feed connections are broken, sometimes transactions are omitted or doubled up, resulting in more time consuming bank and credit card reconciliations. So, if you’re using your books for tax reporting, I highly recommend updating them monthly.

What About Updating the Entire Year at Once?

There are definitely clients who update their books once per year at tax time. There are several problems with doing this. The main problem with updating annually for clients who use a spreadsheet is that they are oftentimes going to forget about what they purchased that had a business connection, which will result in some lost tax deductions. This is especially true if the transactions occur over several different payment methods where hundreds or thousands of different transactions must be pored through for each bank or credit card account.

For clients who use an accounting system, updating the entire year at once oftentimes results in transactions for which the client can’t remember the details, “What did I buy at Target again—was it business or personal?” Where details are insufficient it oftentimes involves making judgment calls as to what makes sense for a particular type of business. Without details, receipts, or notes on what was purchased and why, in the event of an audit by the IRS or state department of revenue, it will be more difficult to substantiate deductions, and this could potentially lead to adjustments to the taxpayer’s return (resulting in additional tax, penalties, and interest owed).

Do you need assistance keeping your accounting software up to date or monthly/quarterly oversight of your bookkeeper’s work? If so, feel free to reach out using the form below.

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