During year-end, Heard will request different reports in order to make year-end adjustments to your books. This ensures your Profit and Loss Statement more accurately reflects your true income and expenses.
This is done by Heard manually creating "adjusting entries" for certain types of transactions. These adjusting entries are designed to bring the financial statements into compliance with accounting standards.
What are adjusting entries?
Adjusting entries are an accounting practice where Heard adds clarifying journal entries to your books to better align your true income and expenses. They ensure that the numbers are complete and have been recorded match up to the correct accounting periods.
Think of it as rearranging and reframing the income and expenses that have already been recorded rather than adding additional income or expenses. The following examples demonstrate two of the more common adjusting entries we perform.
Example: Merchant fee adjustments
If you use an Electronic Health Record (EHR) system that utilizes a credit card payment processor (e.g. Stripe, Square, etc), the credit card payment processor automatically takes out their fees from your therapy income. This means that if you made $100 with $5 in fees, $95 of therapy income is automatically deposited into your bank account. The $95 in revenue is recorded in your books since we have a journal entry for the deposit, but the $5 in fees you paid aren't automatically recorded as an expense since they're deducted before the revenue hits your books.
In order to accurately reflect the fees you've paid in the year, we will need a report that shows the amount of processing fees your credit card payment processor withheld during 2023.
We will adjust your therapy income and credit card merchant fees by the same amount. The net effect is $0 but your books more accurately reflect the therapy income and expenses you paid in 2023.
Example: Revenue timing adjustments
Another common adjustment relates to the timing of when therapy income is deposited into your bank account. You might earn some income in December, and the credit card processor may deposit the income into your bank account in January of the following year. Without adjustment, your December income wouldn't be reported in the correct tax year.
It's important for us to reflect the correct amounts in income in the right tax year. All 1099 tax forms issued to the IRS report the amount of income that is expected from your business. We want to ensure that your therapy income matches what the IRS expects!
Does this mean that your books aren't as accurate as you thought?
Not technically. While some adjusting entries are made to correct mistakes, the adjusting entries we are discussing here are different. These adjustments are not the result of physical events or transactions but are rather caused by transactions that may not have hit your bank statement directly. The net effect to your overall books will be $0.
Which documents should I expect Heard to request at year-end?
In early January of each tax year, you should see a to-do item requesting that you submit year-end reports before the end of January. It's important you submit these documents promptly so that we have time to make the necessary adjustments before tax preparation begins.
The following documents will be requested each year:
- Assets >$2,500 Receipts
- Contractor Payment Report
- December Income Report
- Form W-3
- Merchant Fees Report
See Obtaining and uploading year-end documents for more on why each of these individual documents is requested, how you can obtain it, and where to upload it within Heard.