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It’s the Most Wonderful Time of the Year – Year-End Accounting Cleanup

Posted on November 25th, 2018

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

It’s that time again!  The taxes are coming due, and your books may have gone all year without being looked at by an accountant. If so, what many business owners don’t realize is that when your CPA or tax preparer takes your books to prepare your tax return, they are not performing an “audit,” so they are not providing any assurances to the IRS as to the underlying validity of the income and deductions you show on your books. They may make some obvious adjustments for tax purposes in their own tax software, but may or may not provide those changes to you to enter in your books.

Thus, whenever we review a client’s QuickBooks file, we look at it first from the viewpoint of a CFO / Controller to make sure the financials make sense (and for “book” purposes, not tax). Here are the types of things we look at before I send the financials to an outside CPA firm or tax preparer:

Balance Sheet – Pull it up as of December 31st, and create a comparison to the previous year, and check the following:

  • Bank Reconciliations – This is the starting point.  Make sure your bank accounts are reconciled to the bank statements. This tells you that you at least have accounted for all of your cash. Even if it’s not categorized properly, you can always correct the account classifications later.  Make sure that the “cleared” balance agrees with the ending balance on your bank statement.
  • Credit Card Reconciliations – If you track credit cards in QuickBooks, reconcile those the same way you would reconcile your bank account. Make sure all charges are entered and categorized, all payments are recorded, and that the “cleared” balance in QuickBooks agrees with the year-end credit card statement balance.
  • Negative Account Balances: (other than “Accumulated Depreciation,” “Retained Earnings,” and “Net Income”). Negative balances in any accounts other than these three indicate major accounting or set-up errors and need to be investigated and corrected. For example, common mistakes I’ve seen are setting up credit card or loans accounts as a “Bank” type account, or posting payments to accounts payable without first entering the bills.
  • Due To (liability) / From (asset) Stockholder Accounts:  Throughout the year, funds may be lent to the business by the owner (“Due To” account), or taken out of the business in the form of cash transfers or personal expenses (“Due From” account).  Care should be taken to make sure this information is accurate as these accounts affect your “basis” in the company.  For example, if you take money out of the business that exceeds your “basis,” it can cause you to pay more taxes even if your business had no income.
  • Inter-Company Loans: Multiple “company files” with extensive inter-company transactions, with no effort to reconcile and consolidate the financial statements.  The amount owed to Company A, “Due From Affiliate”(asset side), should logically equal the amount owed by Company B, “Due To Affiliate” (liability side).  If not, investigate and correct.
  • All other balance sheet accounts should be “tied out” to external documentation such as year-end statement balances, loan amortization schedules, etc. A common mistake we see is entire loan payments being posted against the loan balance or the Profit & Loss statement, rather than separating the principal and interest portion.

Profit and Loss – Account Classifications – After your bank accounts have been reconciled, the next step is to create a “detailed” Profit & Loss Statement report (or other accounting report) and do the following:

  • Salaries & Wages – Verify that they agree with your W-3 and W-2s.  If you do your own payroll, make sure it was done correctly and that “gross” salaries are just that, NOT your net paychecks.
  • Officer Salaries – If you are an S-Corporation, ensure that Officer Salaries are “reasonable” in relation to the business’ profit.  And note, what is “reasonable” is very subjective and something you should have discussed with your tax preparer before year-end, as this is closely monitored by the IRS and can trigger an audit.  Read More.
  • Meals & Entertainment are clearly identified.
  • Fixed Asset Purchases – Larger amounts, say over $1,000.00 (your tax preparer may use a larger threshold for tax purposes), should be posted to Fixed Assets on the Balance sheet, not the P&L, and clearly described in the memo field.
  • All other expenses are categorized where they belong and consistent with the prior year, which by now, should also have been adjusted to agree with the prior year tax return (except for book and tax differences).
  • Net Income – Ultimately, your prior year net income should agree with the “Net Income (Loss) Per Books” shown on your prior year tax return (Schedule M-1, line 1), as this is where your tax preparer will begin when preparing your current year taxes.

The above are just a few of the major items that need to be looked at, but these will go a long way toward achieving accounting accuracy.  Again, keep in mind that in the end, the burden of accurate reporting of income and deductions still rests with you – the business owner.

Related Articles:

What Is the Role of a Company’s Controller?

The Difference Between Your CPA and a Controller – M1

How You Use QuickBooks Can Distort Your Company’s Profitability

Winging It In QuickBooks

Why Outsource Your Bookkeeping?


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