Resolutions & Reconciliations
Sure, you should drink more water and spend more time outside, but here’s another resolution to add to your list for 2021: keep accrual accounts current. While it might also make you feel better, keeping your accruals properly reconciled can have a very tangible impact on your business, especially leading up to tax time. Here are a few of our top accrual skeletons-in-the-closet:
TOP ACCRUAL ACCOUNT ISSUES THAT CAN COST YOU AT TAX TIME
Loans Payable - loan payments generally have a principle vs. interest breakdown associated with each payment. This means that a portion of the payment goes toward paying down the overall balance of the loan (the principle), and another portion of the payment is paying the interest on the loan. The interest portion is an expense that can be deducted against income for taxes, whereas principle payments are reducing your overall debt, but don’t generally have an affect on your taxable income. Making sure that your loans are current and reconciled can help make sure that you’re deducting the interest expense you should be.
“See no accruals, hear no accruals, speak no accruals.”
Payroll Accrual & Employee Advances - Payroll accrual accounts can have far-reaching impacts on your books and tax liability. Your business could have payroll that has been paid to employees out of your bank account, but not properly allocated to the different expense and liability accounts (Payroll Payable, Payroll Expense, Employee Advances Receivable, Medical Expense and the various Employer Tax Expense Accounts).
Benefits Accrual Accounts - For many reasons, benefits accrual accounts are frequently (and sometimes VERY) out of whack. One reason is timing—payments going out to benefits vendors happen at different times than the benefit deductions coming out of payroll. Another reason is employee turnover—not notifying vendors that an employee has left the company can lead to you paying for that employee’s benefits long after their last payroll check was cut. The last scenario would mean that those payments to vendors are hitting your Benefits Accrual account when, in fact, a portion of those payments might need to hit a Benefits Expense account if the over-payment can’t or won’t be recovered from the former employee.
Retirement Account Accruals - more frequently than you might believe, businesses forget to make remittances on behalf of their employees. This means that retirement amounts (401K, Roth IRA, etc.) are withdrawn from the employee’s payroll, but then not forwarded on to the provider, indefinitely increasing the balance in the liability account.
NON-ACCRUAL BONUS SKELETON: Petty Cash - Okay, this one is not an accrual account, but it is one that many businesses forget to account for, leaving valid business expenses floating in the murky Petty Cash Nebula. Whether it’s cash withdrawn from the bank account for employee bonuses, or a less exciting expense using cash on hand, track all cash on hand and don’t treat cash payments any differently than those you would normally write checks for, which includes reporting payments to employees through payroll so that they can be properly allocated and reflected on the employee’s W-2.
We all have that one weird drawer at home with all the random odds and ends, or that one closet that we’re scared to open. You’re not alone, and this might be just the time to finally let some sunshine in and do that deep accrual cleaning you deserve.
In this case, you might just find enough money in there to start that Post-COVID Company Picnic Payable account that you and your employees have been looking forward to.
If your Post-COVID Company Picnic Payable account had a credit balance of $5,000, but then you spent $3,750 on the picnic shown above, what is the new balance in your Post-COVID Company Picnic Payable account?