If you haven't done your bookkeeping in a while, you'll need to do a round of catch up bookkeeping before you file your taxes. Dealing with a pile of overdue books won't be the most fun you'll have as a business owner. So we asked our bookkeeping team to create a catch up bookkeeping guide—quick, simple steps you can follow to streamline the task.
If you’d prefer to outsource your bookkeeping to a team of pros, check out Hiline’s bookkeeping services. We can get your books up to date, fast.
What Is Catch Up Bookkeeping?
Catch up bookkeeping is the task of getting your financial records up to date when they've fallen behind. Think of it as time travel for your books: you're revisiting, adding, and correcting past accounting entries to make sure your financial statements (aka "your books") give you a complete and accurate picture of your current financial situation.
The Benefits of Catch Up Bookkeeping
Some of the key advantages of catch up bookkeeping include:
- Financial clarity. With your books up to date, you'll gain a comprehensive view of your business's financial health.
- Better cash flow management. Accurate records make for smoother cash flow management. This translates to better resource allocation and smarter planning for future financial requirements.
- Informed decision making. Having reliable financial data at your fingertips empowers strategic planning. You can set clear goals and manage resources more effectively.
- Easy tax preparation. Organized records from catch up bookkeeping make tax season a breeze. Compliance becomes simpler, ensuring a hassle-free experience when tax season rolls around.
- Risk reduction. By prioritizing accuracy and compliance, catch up bookkeeping helps identify and rectify errors early on. This proactive approach minimizes the risk of legal troubles such as penalties for financial reporting and tax discrepancies.
How to Quickly Process Overdue Bookkeeping: A Step-by-Step Guide
Ready to tackle that pile of overdue bookkeeping? Grab a coffee (or two) and follow these steps to streamline the project.
1. Gather Important Paperwork
First, you'll need to find all the receipts, invoices, and other important paperwork related to your business expenditure. The IRS gives the following examples.
Gross receipts: You need to hang onto documents that prove where this money comes from and how much you're getting. Here are the papers you should hold onto for your gross receipts:
- Cash register tapes
- Records of deposits (both cash and credit sales)
- Receipt books
- Invoices
- Forms 1099-MISC
Remember, businesses are required to retain their receipts for a minimum of 3 years from the date they filed their original return or 2 years from the date the tax was paid, whichever is later.
Purchases: Or the goods you buy and sell to customers. If you're a manufacturer or producer, this also covers the cost of raw materials or parts bought to make finished products.
- Canceled checks or other proof of payment
- Receipts from cash register tapes
- Credit card receipts and statements
- Invoices
Expenses: These are the costs you rack up (aside from purchases) to run your business. Your paperwork should clearly show who you paid, how much, how you paid, when you made the payment, and what you bought or the service you received.
- Canceled checks or other proof of payment
- Receipts from cash register tapes
- Account statements
- Credit card receipts and statements
- Invoices
Travel and entertainment: For travel, transportation, entertainment, and gift expenses, you need to be able to prove certain aspects of your expenses if you plan to deduct them.
Assets: Keep track of your business assets, you need records that confirm specific details like annual depreciation and whether you make a profit or loss when you sell them.
Employment taxes: Maintain all records of employment for at least four years.
2. Reconcile Your Bank Accounts
To reconcile your bank accounts before tax season, start by:
- Gathering your bank statements for the entire tax year.
- Then, comparing the transactions on these statements with your accounting records, like your check register or accounting software.
- Looking out for any discrepancies, such as missing transactions or errors.
- Making adjustments to your records to correct these differences and ensure that your balances match.
Keep track of these adjustments for documentation purposes. By reconciling your bank accounts beforehand, you'll have accurate financial records when it’s time to file.
3. Separate Personal and Business Expenses
Separating business and personal expenses makes it easy to identify and deduct legitimate business expenses at tax season. It simplifies tax preparation and reduces the risk of errors or oversights that could lead to audits or penalties.
But the real benefit here is legal protection. If you mix your business and personal expenses, you may be accused of “piercing the corporate veil.” In other words, by breaking down the barrier between you and your business, creditors or the justice system can come after your personal assets to cover business debts.
Keeping personal and business expenses separate shows the IRS that you treat your business as a separate legal entity, which is important when maintaining limited liability protections.
4. Collect W-9, 1099, and W-2 Forms
W-9, 1099, and W-2 forms are essential for staying compliant and avoiding tax penalties. Ask each independent contractor you work with to fill out a W-9 form, which gathers important details like their taxpayer identification number (TIN).
Once you have their completed W-9s, you can use the information to prepare and issue Form 1099 to each contractor at the end of the year. For employees, W-2 forms are the go-to for accurately reporting their wages and salaries come tax season.
5. Prepare Financial Statements
Generate key financial statements, including the profit and loss statement (income statement), balance sheet, and cash flow statement. These provide an overview of your business’s financial health and are necessary for tax filing.
6. Identify Credits and Deductions
Look for potential tax deductions and credits applicable to your business. This might include business expenses, home office deductions, and energy efficiency improvements.
7. Have a Tax Professional Review Your Expenses
Having a tax professional go over your expenses can make all the difference between a smooth tax filing and a nerve-wracking audit.
These experts ensure accuracy, compliance with tax laws, and maximize your deductions while minimizing your tax liability. Tax professionals are skilled at spotting missed credits and deductions—potentially increasing your refund amount.
They also provide 'audit representation', offering support and representation during an IRS audit. They can guide you through the audit process, communicate with the IRS on your behalf, and advocate for your interests to ensure a fair outcome.
Want to outsource your bookkeeping instead? Hiline can help.
No two businesses are the same, and neither are their bookkeeping needs. That’s why Hiline’s dedicated bookkeeping teams are scalable and designed to grow along with your business.
When you work with Hiline, you get a dedicated team of financial pros—bookkeepers, accountants, and more—that can deliver the right combination of bookkeeping, tax preparation, strategic financial advisory, and other back-office services your business needs to thrive.
If you’d like to outsource your bookkeeping to an accounting partner you can trust, chat with a Hiline Advisor and learn how we can get your books up to date, fast.
Frequently Asked Questions
What is catch up bookkeeping?
Catch up bookkeeping, also known as "bookkeeping clean up," involves reviewing, organizing, and updating neglected financials to ensure a clear financial picture of the business and tax ready books.
What is the catch up approach in accounting?
The catch up approach in accounting involves updating overdue records, while the clean-up approach involves organizing and correcting existing records. Both processes are essential for maintaining accurate and compliant accounting records.
How does catch up bookkeeping benefit businesses?
Catch up bookkeeping benefits businesses by organizing financials, reducing the risk of penalties, and getting a better understanding of your business finances.
When does a business need catch up bookkeeping?
A business needs catch up bookkeeping when financials have been neglected, during overwhelming busy periods, or in preparation for upcoming audits or tax filings.
Sign up for our newsletter.
