Preparing for the end of financial year - it's about as mundane a task as a business can perform. Or at least, the old way was.
Having to complete a series of entirely necessary but ultimately dull tasks before the end of the financial year is something that accounting software providers such as Xero, has made a thing of the past for many businesses.
Cloud accounting software sends all your basic financial information straight to the Accountant’s office in real-time: the basic tax and compliance aspect of an accountant's job is being streamlined by AI and automation.
Prepping for the end of financial year checklist
Where does that leave you with preparing your docs for the end of financial year then? In today’s digital landscape, businesses that have sound processing and reconciliation systems in place should reap the benefits come this time of year. With bank feeds automated, the traditional client/accountant dance of sourcing missing documents is often a thing of the past. However, if you are still working on refining these processes within your practice, or are looking to streamline the end of financial year process even further, there remains a basic checklist of tasks businesses would benefit from.
- Bank statements or a screenshot of closing bank balances at balance date.
- Confirmation that your bank feeds are reconciled up to balance date.
- Confirmation you've reviewed your debtors' ledger and all are still recoverable.
- Invoices and/or confirmation of period of any insurance payments.
- Invoices and/or nature of any legal expenses incurred.
- Details of any transactions you were unsure of how to treat during the year, including the invoice if available.
- Reconcile and analyse your credit cards, if not already done via your accounting software (which they should be!).
- Details of any business funds or assets used or appropriated privately during the year.
- Notification of any new investments or borrowings.
The above tasks should be done more regularly than just at year end. They should simply be business as usual, if not a daily then certainly a monthly occurrence. After all, cloud accounting software makes this easy - it's supplying real-time information on the state of your business now, not where it was a year ago. This accurate data available throughout the year is a revolutionary resource for business owners.
There are also specific tax related tasks you can complete to ensure your business is maximising any tax opportunities as well as making the most of your Accountants time and attention.
Trading stock on hand at year end must be valued. Provisions for obsolete stock or stock write downs are not generally allowed as tax deductions. Therefore prior to year end it is important to perform a stock take and to ensure that all obsolete stock is physically disposed of or is valued using one of the prescribed methods.
Have you written off all debts that you consider are ‘bad’?
Individual trade debts should be reviewed and actually written off in your debtor ledger prior to balance date for them to be allowed as a deduction in the financial year. A debt is considered bad if a reasonable and prudent business person would be of the view it is unlikely that the debt will be paid.
Employee Wages and Leave
Employee related expenses (leave and bonus provisions)
An employer can obtain a deduction for employee-related expenses that are owing at year-end (e.g. holiday pay, bonuses, long-service leave), providing payment is made within 63 days after year-end. Therefore, if you have a 31 March balance date, a deduction is permitted if the payment is made on or before 2 June.
Have you paid more than $5,000 in interest to someone other than a bank?
Is your income significantly higher than the previous year?
If so, you should consider whether an additional voluntary provisional tax payment may be appropriate or alternatively it may be beneficial in aligning your tax payments with turnover. Please discuss with your adviser before balance date. If you have underpaid your provisional tax for the year then it may be possible to use a provisional tax intermediary to save Inland Revenue use of money interest costs.
Assets no longer used in the business
For tax purposes fixed assets can be written off if:
• The asset is no longer in use by the business; and
• Is not intended to be used in the future; and
• The cost of disposing the asset would be more than its disposal value.
We recommend assets be reviewed for use, to determine whether or not a deduction would be available.
Purchases and sales
A full month’s depreciation can be claimed for any part month that an asset is owned and used. It may be worth buying replacement assets on or just before balance date to obtain one month’s worth of depreciation deduction. If you expect to make a loss on sale, consider selling prior to balance date. If you expect to make a gain on sale, consider deferring the sale until after balance date. This will accelerate any available deduction or decelerate the requirement to return taxable income.
The rate of depreciation on buildings for tax purposes is 0%. To maximise depreciation deductions it is important to separately identify, where possible, commercial fit-out (depreciation deductions can be claimed) from the building proper.
Shareholder Loan Accounts and Current Accounts
If your company has loan accounts which have debit balances (including overdrawn current accounts), there could be undesirable tax consequences.
So why do I still need an Accountant?
It won't be long before all businesses, no matter the size, are demanding more than traditional advice from their accountants.
The accountant's role is now to bring those figures to life. They need to help businesses see beyond the numbers, into the better, more informed, business decisions that lie beneath them. Accountants will no longer be accountants in the traditional sense - instead, they will become business advisers becoming active members of your team who can offer you insight and guidance throughout the year (not just at year end!).
About the author: David Pearson is Managing Partner with BDO Central (NI) and has a speciality interest in Advisory Services to the optometry sector. He has extensive experience assisting both small and medium sized entities with a wide range of advisory services. BDO Central are Chartered Accountants and Business Advisors, with offices in Napier and Palmerston North. BDO is able to support clients with a comprehensive suite of Business Advisory services. The firm is an independent member of BDO New Zealand and part of the global BDO network. For more information contact BDO Hawke's Bay or BDO Manawatu.