If closing your books at year-end is key in preparing tax returns, then locking them down at month-end takes them to a whole new level. We all know the importance of having your Balance Sheet tied to the tax return after it’s filed, but do you wait until the end of the year to enter and adjust everything? The bigger question really is: should you?
Locking down your books at the end of the month means that no one can go back in time and make changes without your express authorization. Getting into the habit of locking down your books each month will yield tremendous dividends in that your books will be organized, streamlined, and ready for tax deadlines.
Here are 5 reasons why your ledgers should be locked down every month (as opposed to annually):
- To gain control. If you’ve ever stared at your financials and realized you have no idea whether anyone went back and moved things around, deleted transactions, or booked additional revenue in the past 24 hours, you’re not alone. This is very common and also upsetting. As a general rule, the more hands that are touching your bookkeeping software, the more control you need in order to keep everything in order.
- To ensure accuracy. A negative accounts receivable balance is nice to see because all of your customers have paid on time. But is that the truth? Is that balance accurate? If you adjust your ledgers at the end of the month, you probably think everything's in order. However, what if a transaction was mistakenly booked with the wrong date? Little things like that happen all the time. By locking down your books at the end of the month, you gain peace of mind knowing you password-protected your information as soon as the last adjustment was recorded.
- It saves time. Going back to item #2, no one is exempt from mistakes, but the idea is to dramatically reduce the periods where mistakes can occur. If your books are open for the entire year, it will take longer to clean up the mess.
- It saves money. If you know the whole thing is a mess and you know it’s going to take time to make it all right again, you probably don't have the time to fix it all and keep running your business. This is when your accountant can help you out—but the bigger the mess, the more it could cost you.
- It gets your accountant excited. If you lock your books at month-end, after all adjusting entries are booked, your accountant will be very excited—not just because you’re protecting the integrity of your financial data, but also because we can quickly provide you with compilations and/or tax returns.
How to lock down your books every month
With cloud technology, it's no wonder that everything can be protected with a single password, including your journals. If you’re still using paper ledgers, then you miss out on yet another great feature here. Xero users can create a password for each month's books when they're ready. Advisor users have the option to still make changes to the account if needed without having to key in a few digits every time, but we recommend selecting the all inclusive option as an ultimate show of self-discipline and commitment to clean bookkeeping.
The trick lies in who keeps the key. If your accountant is also your bookkeeper, he should keep the password safe from other users. If you have a bookkeeper in-house, the password should only be known to that individual or the accounting department—whoever knows how your financials need to look.