In general, “ready for tax return ready” means the following:
The beginning balances of every asset and liability account from the previous tax return (i.e. as of 12/31/2019) match in your accounting system.
The ending balances of assets, liabilities, and equity/capital for the current year closing (i.e. 12/31/2019) make sense and match the true reality of all the components of value that the business owns (assets) and owes (liabilities).
All banks, credit cards, and loans from banks or financial institutions are RECONCILED, which means all the transactions in each account (debits and credits) match what the bank or financial institutions have.
Only tax deductible expenses are recorded in the books or the non-deductible expenses as clearly identified and grouped, so the tax preparer can exclude them from the net income calculation
The reports are properly prepared based on accounting basis:
- Cash basis implies that all payments from customer during the period are income and all payments to vendors during the same period are expenses; regardless when the income was earned or expenses were incurred. There should be no customer deposit liabilities, no vendor prepayment asset, no accounts receivable, no accounts payable, and no inventory (in most cases) recorded in the books
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- Accrual Basis actually only recognizes income when earned and expenses when incurred, regardless if payments are made during the period. Under Accrual basis, all payments in/out not pertaining to earned income and incurred expenses for the period will affect the balance of accounts receivable, customer deposit liabilities, accounts payable, vendor pre-payment asset, etc. and inventory is accounted for, so only inventory SOLD becomes a cost.
- Hybrid Methods will actually take parts of each of the two methods, there are no specific rules around who can or cannot do a hybrid, but it must be consistent and well documented
Other important items such as depreciable fixed assets, amortized other assets, officer loans, etc. have special rules (consult with your tax pro)
If you need advice or services on any aspect of bookkeeping, accounting and tax, our specialists are ready to help. Get in touch with us for free quote.
