Though there are many tips and tricks you can apply to your accounting practices as a contractor, there is no standard way of doing things. You can conduct your accounting via pencil to paper, through an online accounting software, or alongside an accountant who specializes in organizing finances for contractors. In addition, you can conduct a bank reconciliation as a contractor on a daily, monthly, quarterly, or annual basis.
So, there is no one correct way of accounting for contractors. There are a number of ways you can split up your accounting tasks to reach the same result. However, there are best practices you can follow that ensure you’re set up for success at the end of a fiscal year and during tax season. One of these practices is to conduct your bank reconciliation on a monthly basis. In this article, we’ll cover the basics of accounting for contractors and why monthly reconciliation is your key to monitoring and comprehending your financial wellbeing.
What is account reconciliation? This question may seem basic to answer on the surface, but as with much of accounting, the answer gets more complex the more you have going on in your business.
On the surface, bank reconciliation involves determining exactly how much money has been going in and out of your business for a given period of time. This period is usually for a fiscal year, as once the year ends, you’ll be on filing your taxes for the finished year during tax season.
Posting and reviewing every transaction, including checks issued and deposits received, ensures your financial records are accurate and up to date. It also helps you identify any missing payments or inaccurate entries early on. So instead of identifying mistakes in any number months-old receipts frantically before submitting your taxes, you can correct one or two per month.
So, what is account reconciliation in a nutshell? It’s the process of making the financial maintenance of your business as a contractor much simpler.
As stated above, as a contractor you have options as to how you accomplish your monthly bank reconciliation. You can either accomplish a monthly reconciliation through an accounting software, which requires more time and effort on your part as you’ll be the one entering and checking your financial data. Or, you can hire an accountant to reconcile your accounts. If working with an accountant, you’ll put less time into reconciling your general ledger balance. In addition, hiring an accountant for monthly reconciliation comes with a guarantee that your financial records are mistake free and within compliance of the law.
Either way, reconciling your accounts on a monthly basis ensures you’re keeping your financial wellbeing in mind while also taking care of all the other elements you must manage when running your contractor business. Accounting for contractors can get complex quickly, but monthly reconciliation keeps things simpler.
Now that we’ve covered what is account reconciliation, let’s briefly discuss the different types of monthly reconciliation you’ll likely encounter when covering accounting for contractors.
Business owners must reconcile their accounts to prevent things like fraud, balance sheet errors, and avoid fees associated with noncompliance with auditors or regulations. After the books are closed for a given month, companies typically perform a bank reconciliation to review all balance sheet accounts. This ensures that their business’s transactions (such as payments and billed items) are accurate and accounted for. It keeps businesses out of the kind of trouble that could end up costing them hugely down the line.
As a contractor, you’ll likely be more concerned with business reconciliation more so than personal reconciliation. However, being mindful of your personal checkbooks, credit cards, debit card receipts, bank statements, etc. will support the financial wellness of both you and your business. As mentioned previously, accounting for contractors can get complex. There’s a lot of interacting with people and businesses, and all this interaction will inevitably lead to some sort of accounting error at some point.
For example, perhaps you had to pay a vendor in person for some last-minute supplies you need for a job the next day. In the past you’ve paid this vendor using their online portal and they send you an invoice shortly afterward. The typical process is easy, and you can pay that invoice without a single worry. Unfortunately for you, however, when you paid this particular vendor in person, you grabbed your personal credit card instead of your business credit card. They’re both the same size, weight, and happen to be the same shade of blue. It’s an easy mistake to make, but it can be a difficult one to remedy if left unnoticed for months.
While business owners tend to put more emphasis on business reconciliation over personal reconciliation, keep in mind that situations like the one listed above can happen. So, try to reconcile your personal accounts every so often alongside your business accounts. Accounting for contractors is all about remaining mindful of your financial overview and improving your business’s performance as time goes on.
As a contractor, your bread and butter isn’t exactly balance sheets and scanning credit card statements. Those paperwork-heavy tasks likely aren’t why you started your contracting business in the first place, so it can feel easy to push them off to another day while you dedicate yourself to your daily work.
But monthly reconciliation is vital for contractors who want to know how their business is performing and implement tactics for improving the financial welfare of that business over time. It’s not only important for tax season, but essential for implementing strategies for growth.
In addition to providing you with essential information of your financial wellbeing, the following are reasons why monthly reconciliation is so important for contractors:
4Corner Business Service's team of experienced accounting and bookkeeping experts provide you with the financial information you need to make critical business decisions. In addition to bookkeeping for small and large businesses, 4Corner offers payroll help, support in choosing and using accounting software, professional tax services, and valuable financial advice to guide decision making. We help businesses both large and small perform monthly reconciliations so you can focus on growing your business with a framework built for success.
We can provide your Denver, CO contractor business with all the bookkeeping and accounting services you need so you can better understand your business’s finances and maximize your profit potential. At 4Corner Business Services, we are the experts who help you understand what financial services you need. We address all your accounting needs from general ledger accounting to other small business accounting services so you can focus on the other important aspects that come with running a small business. We can also help you budget and track annual business revenue, giving you invaluable insight into how your business is currently performing and how it is projected to perform.
If you have any additional questions, feel free to contact us at 4Corner Business Services. You can set up a meeting with Phil Zavala, founder of 4Corner, to get you on the right track.
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