A historical bookkeeping clean up is a daunting task, even if you are a company with a few monthly transactions. We take the guesswork out of it with professional accounting techniques and intuitive software solutions.
In this article, we give you:
- Understanding the goals of your bookkeeping clean up
- Documents needed for both accounting methods
- Batch processing tips for a high volume of transactions
- A historical bookkeeping clean up checklist to close out the books
What Is A Historical Bookkeeping Clean Up?
Essentially you are recording past transactions as if they were being recorded when they happened. Then, you reconcile all accounts for each period. This produces net income for financial statements, from previous periods, so you can visualize business performance. Giving you a clear picture of where your company stands and a fresh start for bookkeeping in real-time.
Nobody starts a business to do accounting. Financial maintenance is hard for busy companies and nuanced itemization doesn’t make for a relaxing Friday night. Understandably so, you get behind on the books and need to tidy up with a historical bookkeeping clean up.
There are benefits to hiring an accountant for messy accounting books. The cost of an accounting cleanup is time. Performing a project like this with speed, requires a great deal of accounting knowledge. Plus backend tech experience if your business is eCommerce or SaaS. Money is a factor too because any reporting errors could incur penalties, inevitably costing you more time on a redo.
Ready for accurate data to drive future investments? Our team will get you back on track with a bookkeeping clean up tailored to your business!
Understanding Opening Equity
Before we jump into this accounting project, you should get to know your opening equity account. This is a holding account on the equity side of the balance sheet. As you start entering transactions from past accounting periods, you will see a balance in this account. It’s a trial balance for net income, once you finalize bookkeeping you will transfer this balance to your other equity accounts.
How to fix bad bookkeeping with opening equity?
During clean-ups it is opening equity where you will hit some snags. It is a temporary account, so unless you are closing the books the balance should be zero. As you balance your accounts, if there’s an error on the equity side, that is an indicator of inaccurate data entry. Either journal entries were not accurately reconciled to bank statements, or there are uncleared transactions that haven’t been tallied.
What Is Revenue Recognition?
Another hurdle in a bookkeeping clean up is revenue recognition. For revenue to be recognized, a business needs to fulfill all performance obligations of a sale. In layman’s terms, you earned a sale, the customer received something of value, and there is proof of exchange within a specified timeframe.
Continuous accounting maintenance prevents improper revenue recognition and misstated income. How? Keeping up with sales and expenses in real-time you don’t have to rely on memory when reviewing transactions.
Profit & Loss Statement (P&L) vs Balance Sheet
Formulating numerous P&Ls and balance sheets is part of a historical bookkeeping clean-up. The critical difference between a profit and loss statement vs a balance sheet is revenue recognition.
A P&L shows a detailed snapshot of income for a certain length of time. This is where your opening equity account balance is itemized as gain or loss before it is transferred to equity accounts. That is why P&L’s show temporary accounts, these accounts get closed-out in each period because they report recognized revenue and expenses.
A balance sheet is like the report card of your assets, liabilities, and equity. These are permanent accounts that roll on for the life of your business. When you close out a period, your balance sheet displays ending balances in all accounts which become the opening balances for the next period.
How To Clean Up Messy Bookkeeping
Before you dive into a bookkeeping catch up project, be mindful of your time. Just like any other financial project, when you clean up accounting books, you need to have a plan. Prioritize accuracy with a healthy timeline, so the books are ready for any other pending financial events:
- Tax season clean up
- External or internal audit
- Switching your accounting method
- Series investment rounds
- Applying for a loan
- Presenting earnings reports to current investors
These financial events impact the future of your business, so time management is of the utmost importance. Regardless of how far bookkeeping goes back, meet your deadlines by allocating a reasonable amount of time to the project. Most issues stem from the backlog of transactions. Revising mistakes will be endless, accuracy isn’t achieved in a week.
Pro Tip: Get a peer review from an accountant to ensure your work is correct, before you close out.
Cash Or Accrual Accounting Clean-up?
Do you perform cash or accrual-based accounting? This will be important in determining what kind of financial information and documents to gather. Here are the broad strokes of accounting with each method:
Cash vs Accrual Accounting
Cash Accounting Method: recording revenue and expenses as cash changes hands.
Accrual Accounting: recording revenue and expenses as they are incurred so they occur in the same period. Each business transaction makes an equal and opposite change in at least two different accounts.
Warning! Doing a historical bookkeeping clean up to prepare for an accounting method switch demands an accountant. You need to treat your company’s income with extreme care because any omissions or duplications can affect your tax liability for years after the switch. As always, when it comes to the IRS, these errors are costly.
What Documents To Gather: Cash vs Accrual Accounting
Whether you are performing a cash or accrual accounting clean up, you’ll need to organize your messy receipt drawer. Organize your documents by months, quarters, and years to have a better idea of the scope of your project.
For cash accounting, a bookkeeping clean up will rely on your bank and credit card statements. In addition, you will need all your transactional receipts. If you lost some receipts it is okay, bank and credit card statements will be your acting source of truth.
If you record transactions with the accrual method, your document collection will be more extensive. Just like the cash method, you will need all your credit card and bank statements, plus any financial statements from previous closeouts.
Don’t have financial statements? Start gathering everything with a money sign on it.
What do I need for accrual bookkeeping clean up?
Any financial documents—invoices and bills, statement of work orders (SOW), COGS reports, payroll, commission calculations, tax payments, distributions, stock expenses, loan interest payments, depreciation schedules, etc. Scroll down to the historical bookkeeping checklist for all items needed.
When your business accrues or defers revenue, that alters the timing of revenue recognition. Making documents like contracts with your clients and vendor reports, the contributing factor to taxable income in each accounting period.
Software For Bookkeeping Catch Up
Business accounting gets messy. When day-to-day operations take precedent, transaction entry and reconciliations are put on the backburner. With the luxury of technology, no project is impossible. Accounting software shrinks the time you spend entering transactional data.
Major tip: Use batch transactions in your accounting system. Xero has bank rules that you can set for recurring bills and invoices, making reconciliation go 10x faster. For year long bookkeeping clean up projects we use custom coding to import large data sets for batch processing.
Historical Bookkeeping Clean Up Checklist
Now that you have a plan and know what you are getting into, it’s time for accounting. Use this historical bookkeeping clean up checklist, for each bookkeeping period you need to recover. At the end of each year you will need to perform an annual year-end close, an extra step noted at the end of the checklist.
Pro Tip: perform this clean up however you normally record income. Governing bodies and business agencies want to see consistent reporting of income. If you do quarterly closeouts, then use the checklist for each quarter, same for monthly close outs.
White Glove Historical Bookkeeping Clean Up
Falling behind on accounting? No problem! We have worked on 100’s of projects rapidly rebuilding financial records. Our accounting team provides a white glove experience where your finances are handled with speed and accuracy. Even more, we guide on tax dues or back pay disclosures.
