Posted by Joseph Gaudio, CPA
Many of our clients who own closely held businesses do not have a full-time accountant on payroll. The owner is forced to be the jack of all trades. After a long day consisting of sales, marketing, meetings, changing the water cooler, and all of the other small and significant responsibilities that fall in the lap of the owner, he or she will find their way to the laptop to update QuickBooks for the business transactions of the day.
It’s often very difficult for a non-accountant owner to know whether the output of their input is producing financial reports that contain complete and accurate information needed to efficiently prepare a tax return. It’s not the owner’s fault. If you’re not an accountant, it’s impossible to know what to look for. And that’s the anomaly of QuickBooks and most modern accounting software. The system produces reports that look pretty, even when they are completely wrong.
Here are some of the more common mistakes and quick ways to check your work:
Most owners do a great job with reconciling their bank accounts. After all, cash is king, and regularly evaluating the cash position is an extremely important metric to measuring success. Unfortunately, doing a bank reconciliation doesn’t always mean cash is accurate.
A great quick check of cash is to generate a Balance Sheet Standard Report and the bank reconciliation for the same period. If the cash balance on your balance sheet does not agree with the register balance on your bank reconciliation, there is an error.
The discrepancy above is often caused by making changes to the detail of a cash transaction after the bank reconciliation has been completed (i.e., changing a date to a different period, or deleting a check). These mistakes can result in timing differences between cash on your balance sheet and the register balance on your bank reconciliation.
Generate a Balance Sheet Standard Report and an AR Aging Detail Report for the same period. First, verify the total on the aging report agrees with your balance sheet AR value. Second, review each customer and their related balance on the AR Aging Detail Report. This report should accurately summarize all of the cash owed to you by all of your customers. If it doesn’t, there are likely mistakes in the way receivables are being recorded.
The QuickBooks accounts receivable module functions extremely well when you do two things:
- Create an invoice when billing a client or customer.
- When the payment is received, apply the cash receipt against the previously created invoice.
The most common mistakes we’ve seen:
- An invoice is created in QuickBooks, but the related cash receipt isn’t applied to the invoice.
- No invoice is created and the cash deposit is posted in error as a reduction to accounts receivable.
Either of these errors can cause accounts receivable or sales to be greatly misstated. It is very important that the correct process for using the AR module is consistently applied to each and every accounts receivable transaction.
AP is similar to the accounts receivable process. You need to Enter Bills and apply the payment against the bill that was created. Any mistakes in the process can greatly misstate accounts payable or expenses.
There are two scenarios where bills should not be entered through the AP Module:
- Credit Cards – credit card charges and payments should be entered through the related credit card processing module.
- Debt Payments (loans, notes, line of credit, mortgages, etc.) – see below for more info.
Generally payments made to a bank consist of two pieces: interest expense and a reduction of the loan balance. When using the Write Checks feature in QuickBooks it’s important to allocate the total cash payment on the check image between these two buckets.
To check your work, pull a copy of your most recent loan statement and agree the principal balance with the amount shown on your Balance Sheet Standard Report in QuickBooks.
Prior Year Adjusting Entries
Typically accountants need to make accounting and tax adjustments when preparing a business tax return. If your accountant provided a list of adjustments, you’ll need to post these adjustments in QuickBooks (typically on the last day of the fiscal year).
If these or other issues are identified during the year and you do not know how to fix them, we recommend you contact your tax advisor for assistance. This can improve your tax accountant’s efficiency when preparing your tax return and ultimately provide more meaningful reports to analyze your business results throughout the year.