Q3 Close-Out - Morning Star Bookkeeping

How to Close Out Your Q3 Books Like a Pro: A Step-by-Step Guide for Small Business Owners

If you’ve been dreading the task of closing out your Q3 books or feeling overwhelmed by the process, you’re not alone! Managing your books and ensuring everything is ready for the next quarter can feel like a daunting task, especially with so many moving parts in your business. But don’t worry—you’re in the right place. In this post, we’re going to break it down step-by-step so that by the end, you’ll feel confident about closing out your books and preparing for Q4.

So, grab your coffee, tea, or wine (whatever makes this process more bearable), and let’s dive in!

Why Closing Out Q3 Books is So Important

Before we get into the technical steps, let’s talk about why it’s crucial to close out your Q3 books properly. It’s not just about ticking a box or staying organized. Properly closing your books sets the foundation for smooth tax filing, accurate financial statements, and better decision-making for your business. Here’s why it matters:

Tax Readiness: Closing your books means you’re ready to pay your quarterly estimated taxes. Being organized now helps you avoid penalties, interest from the IRS, and scrambling for paperwork later.
Financial Clarity: Having a clear understanding of your financial position allows you to see where your business stands—whether it’s profitability, cash flow, or any financial issues that need attention.
Strategic Planning: Knowing how you performed in Q3 is critical for planning Q4. What went well? What needs improvement? What can you do to hit your goals next quarter? Closing out your books gives you the insight you need to answer these questions.

Step-by-Step Guide to Closing Out Your Q3 Books

Now that we know why it’s important, let’s break down the specific steps you need to follow to close out your Q3 books properly.

Step 1: Reconcile Your Accounts

Start by reconciling all of your business accounts—this includes your bank accounts, credit cards, PayPal, Stripe, and any other payment processors. To do this, compare each transaction in your bookkeeping software to your bank statements. If the numbers don’t match up, find the discrepancy and resolve it.

Pro Tip: Most modern bookkeeping software, like QuickBooks or Xero, offer automated reconciliation tools to make this process easier. Don’t be afraid to use these features—it’ll save you hours of manual work! Be sure to double check these though…automation is great, it isn’t perfect.

Step 2: Review Your Accounts Receivable Aging Report

Your Accounts Receivable Aging Report lists all the money owed to you by customers or clients. It breaks down how long invoices have been unpaid, usually into categories like “Current,” “30-60 Days,” “60-90 Days,” and “90+ Days.”

Current invoices are within the normal payment window.
30-60 Days: These invoices are overdue. It’s time to follow up with polite reminders to your clients.
60-90 Days and beyond: At this stage, you may want to make phone calls or even consider implementing late fees to encourage payment.

This report is crucial because it impacts your cash flow. You don’t want to enter Q4 with unpaid invoices dragging you down, so reach out to clients with outstanding balances and get those payments in.

Step 3: Review Your Accounts Payable Aging Report

Your Accounts Payable Aging Report shows all the bills you owe to suppliers, contractors, or other vendors. It works much like the receivables report but in reverse—it categorizes what you owe based on how long the bills have been outstanding.

Current bills are within their payment terms.
Overdue bills should be paid as soon as possible to avoid interest, penalties, or strained relationships with suppliers.

Review this report to make sure all expenses are recorded and that you’re up to date on payments. If there are any overdue bills, prioritize paying them off to maintain a healthy relationship with your vendors and ensure smooth operations.

Step 4: Adjust Journal Entries

Next, you’ll want to adjust for any prepayments, deferred revenue, or accrued expenses. This step is key to making sure your financial statements accurately reflect your business’s financial position.

Prepayments: If you paid for goods or services in advance, you’ll need to adjust your entries to reflect the portion used up in Q3.
Accrued expenses: If you’ve incurred expenses but haven’t yet paid them (for example, wages or utilities), make sure these are accounted for in your books.
Deferred revenue: If you’ve received payment for services that won’t be completed until Q4, you need to adjust your entries to reflect this.

Making these adjustments ensures that your Profit & Loss (P&L) statement and Balance Sheet are accurate.

Step 5: Review Your Financial Statements

Now that your accounts are reconciled and your journal entries are adjusted, it’s time to review your key financial reports:

Profit & Loss Statement: This report shows your revenue, expenses, and profit (or loss) for the quarter. Compare it to previous quarters and last year’s Q3 to identify any trends.
Balance Sheet: The balance sheet gives you a snapshot of your assets, liabilities, and equity. Is your business in a stronger financial position than it was at the end of Q2? This report will tell you.
Cash Flow Statement: This report shows how cash moved in and out of your business. Are you generating enough cash to cover expenses? Are you holding too much cash and missing investment opportunities?

Analyzing these reports helps you understand the health of your business and will guide your decisions for Q4.

Step 6: Inventory Check (If Applicable)

If you’re a product-based business, now is the time to do an inventory check. Compare your actual inventory to what’s recorded in your books, and make any necessary adjustments. This will ensure that your Cost of Goods Sold (COGS) is accurate and that you’re not overstating or understating your profits.

Important Deadlines and How to Pay Your Quarterly Taxes

Now that your books are closed for Q3, it’s time to turn your attention to important tax deadlines.

September 30th: This is the official end of Q3, and ideally, you should start the closeout process in the first week of October.
October 15th: If you filed for a tax extension for your 2023 return, this is your last chance to file without penalty. Make sure everything from Q1 to Q3 is accurate.
January 15th: Your Q4 estimated tax payment is due. However, if you’ve already closed out Q3 and have a good estimate for Q4, you might consider paying early to avoid stress in the new year.

How to Pay Your Quarterly Taxes

You can pay your quarterly taxes online through the IRS’s Direct Pay system, EFTPS, or by mailing a check.
For state taxes, check your state’s tax authority for deadlines and payment options.

Common Mistakes to Avoid When Closing Out Your Books

Before we wrap up, let’s quickly review some common mistakes small business owners make when closing out their books:

Not Reconciling Accounts Properly: Even a small mistake in reconciliation can lead to bigger issues down the line.
Forgetting to Record Cash Transactions: Don’t overlook small cash transactions—they can add up!
Mixing Personal and Business Expenses: If you’ve mixed personal and business expenses, make the adjustments now to avoid complications during tax season.
Skipping the Review Process: Don’t just close out your books and walk away. Review your financial statements to identify any trends or issues.
Not Backing Up Your Data: Always back up your financial data, either to the cloud or an external drive.

Final Thoughts

Closing out your Q3 books doesn’t have to be overwhelming. By following these steps and reviewing your financial statements carefully, you’ll be in a strong position to enter Q4 with clarity and confidence. And, most importantly, you’ll be prepared to handle taxes without the usual last-minute stress.

If you need more help with closing out your books or preparing for taxes, I offer personalized one-on-one sessions. Feel free to reach out to me, and we’ll get your books in tip-top shape for Q4 and beyond!