How to catch up on bookkeeping

The ATO says businesses are legally required to keep records of the transactions its record-keeping rules cover, from starting the business through to selling or closing it, and that accurate and complete record keeping belongs in daily business activities. It warns that not meeting these requirements can have legal and financial consequences.

Its guidance on accountability says penalties may apply if you don't keep or retain records as required, and that a penalty may be a direction to do a record-keeping course or a financial penalty. business.gov.au gives a similar picture: if the ATO finds an error in your records, you may have to pay financial penalties or complete a record-keeping course.

Up-to-date books also do day-to-day work. The ATO lists monitoring cash flow, keeping track of money you owe and money owed to you, and knowing whether the business is making a profit or a loss among the benefits of accurate records. Books that stopped months ago can't tell you any of that.

The ATO says that as the business owner you are accountable for understanding your record-keeping obligations, and that you keep primary accountability even if you give the job to another person, such as an employee. You can get help with a backlog, but responsibility for the records stays with you.

Find the last date the books were reliable. Often, that is the end of the last month in which every bank account was reconciled.

Then list every account the books need to cover:

• each business bank account
• business credit cards
• loans and finance accounts
• petty cash, if you keep it
• anything else money moves through, such as a payment platform or merchant account.

For each one, note the date it was last reconciled. The earliest of those dates is where the catch-up starts.

Collect everything for the whole period before you start entering. Gaps found halfway through slow the work down.

• Bank, credit card and loan statements for every month, downloaded from online banking.
• Sales invoices you issued and records of cash sales.
• Supplier bills, receipts and records of cash purchases.
• Lists of unpaid customer invoices and unpaid supplier bills.
• Notes on unusual transactions, such as money you put into the business or took out.

business.gov.au lists records of all income and sales, all business expenses including cash purchases, and bank records among the records a business needs to keep. The ATO says a record generally needs to show the date, the amount, a description and the purpose of the transaction. Where a document is missing, ask the supplier or customer for a copy rather than guessing at what a payment was for.

Start with the earliest month that isn't reconciled and finish it before you begin the next. Working in date order means each month starts from a confirmed opening balance, and a mistake found in one month doesn't undo work already done on later ones.

For each month:

1. Enter or import every transaction from the bank and card statements.
2. Match each transaction to its document and record it in the right account.
3. Record cash transactions and anything else that didn't go through the bank.
4. Reconcile each account, explaining the difference between the balance in your books and the statement balance, including any uncleared payments or deposits.
5. Mark the month as done and carry the closing balances forward.

Each statement's opening balance is the previous statement's closing balance. Once a month is reconciled, the statement and book balances should agree after allowing for documented timing differences and correcting errors. Investigate any unexplained difference before going further.

The reconciliation is the check that a month is really finished. Work through the statement, match each line to an entry in your books and explain every difference. Timing differences, such as a deposit recorded on the last day of the month that reaches the bank the next day, carry forward. Missing entries and errors are corrected, with documents to support each correction.

Don't force a month to balance with an unexplained adjustment. The ATO's record-keeping tips include checking for mistakes when things don't add up, and a difference left in an early month follows you through every later one.

With the bank accounts reconciled, check what is still owed in each direction.

• Unpaid customer invoices: confirm each one is still unpaid, and follow up those that are overdue.
• Unpaid supplier bills: match them against payments already recorded, so nothing is paid twice.

business.gov.au includes lists of debtors, the people who owe you money, and creditors, the people you owe money to, among the end-of-year records a business needs to keep.

When the last month is reconciled, look over the reports for anything out of place, such as an expense account that has jumped or a balance that is negative when it shouldn't be. If you find errors in a period whose reports have already been used, ask your accountant how to correct them.

Then set a routine that stops the backlog returning. The ATO's record-keeping tips include keeping accurate and complete records as transactions occur. A short weekly session to enter transactions and file documents, with a monthly reconciliation, is a simple routine to start with.