Preparing Key Financial Statements for Tax Season

Preparing Key Financial Statements for Tax Season

Tax season doesn’t have to be a frantic rush if you keep your financial statements in order throughout the year. A smooth, organized year-end is a finance team’s best friend when it comes to the subsequent tax season. So, as your business is going through this year’s tax process, we want to remind you of what you can do throughout the rest of the year to ensure pain-free tax filing come next spring.

The most important thing you can do to set yourself up for success during tax season is to prepare your financial statements from the previous year properly and in a timely manner. Having the right tech stack in place can help automate processes like expense management, monthly close and accounts payable and receivable. Then, preparing your year-end financial statements should be straightforward.

We’ve compiled a list of key financial statements that will help you review your company’s progress at year-end and prepare for the future.

Income Statement

Reviewing your income statement allows you to:

  • Find your business bottom line
  • Compare the current year’s performance to the previous year’s
  • Analyze your performance against your budgeted results

With this information from your income statement, you’ll be able to forecast the company’s financial future, budget for the upcoming fiscal years, set realistic financial goals and improve efficiencies.

Having the right financial tech stack in place and utilizing automation means that you can categorize expenses and integrate all corporate spending with your ERP — allowing your finance team to reconcile expenses in minutes instead of days.

Balance Sheet

The balance sheet lists all of a company’s assets, liabilities, and shareholders’ equity. Complete an audit at the end of the year to ensure that your balance sheet is correct. This can be internal or external, and there are a variety of software solutions that can assist here.

What’s important is ensuring that all accounts are reconciled, fixed asset and debt schedules are rolled forward for the new year, and that the retained earnings are correct.

Cash Flow Statement

A cash flow statement provides details of a company’s cash during a specific amount of time. It takes into account the operating activities, investing activities, and financing activities of the business. By combining the earnings or loss of these three categories and adding it to the beginning cash balance, you get the end cash balance.

By tracking when and how money flows in and out of your business each month, you will be able to see patterns of when cash flow is flourishing and when it is struggling. This will help you to create future cash flow forecasts and predictions.

Year-End Closing Journal Entries

Closing journal entries are made at the end of an accounting period to zero out temporary accounts and transfer their balances to permanent accounts. 

Recording your year-end closing entries ensures that your company’s retained earnings account shows actual revenue and expenses for the year. 

You’ll need your income statement for the current accounting period to post year-end closing journal entries.

Financial Ratios

Financial ratios compare numbers between line items in your financial statements to benchmark company or industry averages. It’s a useful tool for recognizing successes, as well as uncovering and fixing underlying problems.

The most important ratios to review are:

  • Performance ratios: ability to generate profit
  • Liquidity ratios: ability to pay bills promptly
  • Leverage and coverage ratios: estimates debt and ability to pay it off
  • Activity ratios: how quickly your assets and liabilities turn over (efficiency)

These ratios are only able to be reviewed if your company is consistently generating financial statements, so it’s crucial to keep up-to-date.

By keeping on top of financial statements, you will have a much better understanding of your company’s overall financial health and will therefore be able to react more quickly and efficiently when changes need to be made.

You’ll also be well-prepared for tax season, lightening the burden on a typically stressful period for your finance team.

For more tips on perfecting year-end close to make tax season easier on everyone, check out our recent guide, Preparing Your Business for a Better Tax Season.

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