Quickbooks – 5 Steps

Even though Quickbooks is a very intuitive, inexpensive, and easy to use bookkeeping and accounting software, there are many areas where things can go off kilter. If one is not trained in bookkeeping or accounting, they may not find out about the problem until their tax preparer gets the file to do the tax return.

This can cause a number of problems. First, the estimated taxes you paid, if based on numbers from reports throughout the year, may be overpaid or underpaid. This could cause you to be penalized at tax time.

Second, having your tax preparer diagnose, find and correct these errors at tax time could cause your tax preparation bill to skyrocket. For corporations, LLC’s and partnerships, the balance sheet may have to be adjusted to match the prior year end tax return, and then corrections to the current year must be made. This is time consuming and will up your bill.

Third, not having a real-time set of books will not help you run your business. If the books are wrong, all the planning and management decisions based on your financial reports are based on erroneous data.

Here are 5 Quickbooks reports that can help diagnose problems that may be rectified before submitting the file to your tax person:

1. Go to ‘Reports’ then ‘Company and Financial’ then ‘Balance Sheet Standard’. Go to ‘Dates” and select “Last Fiscal Year’ if doing this check in the next year, or ‘This Fiscal Year’ if working on in the same year. That is, if you’re doing this as of July 31, 2010, then just enter 12/31/10 in the date box. It should show the correct date in for your tax year (eg, 12/31/2009). Now, scroll down to the Equity section of the Balance Sheet and be sure there is no figure in the account ‘Opening Balance Equity’. If there is, double click on the amount shown to see if you can determine where the number came from. If you can correct it or contact your accountant/preparer for instructions.

2. Next, look at Accounts Receivable. Make sure your Balance Sheet shows the ‘accrual basis’ (unless you are strictly on the cash basis for books and taxes). Print out an Accounts Receivable Aging Report for the same date as your balance sheet. Go to Reports, Customers & Receivables, AR Aging Summary and enter the date (12/31/xx) or whatever date your Balance Sheet shows. Check to see that the balance matches the figure on the Balance Sheet Accounts Receivable figure. If so, review the list of customers to insure that the customer balances are correct. Make any necessary corrections that need to be made. Write-off any bad debts. If the balance doesn’t agree and you don’t know how to fix it, contact your tax person or accountant.

Also, check the Accounts Receivable balance on the ‘cash basis’ to make sure there is not a figure as a balance. If so, you need to determine what it might be. Could be a problem with an invoice, or receipt of cash, or a negative balance may be an unrecorded invoice or a prepayment/customer deposit paid in advance. In either case any discrepancies need to be corrected.

3. Check the Undeposited Funds account on the Balance Sheet and verify the balance is correct. This account is for monies you’ve collected from customers or clients that have not been deposited yet. Go to Banking, Make Deposits, and see if the total detail there matches the balance on the Balance Sheet. If not, reconcile and correct the numbers.

4. Check the Balance Sheet liabilities for any negative balances and determine why they are off. Ensure credit card balances, accounts payable balances, and loan balances are correct at year end. Check them against the statements from the credit card and loan companies.

5. Next, go to Reports, Company & Financial, Profit & Loss Standard. Go to ‘Date” and select ‘Last Fiscal Year’ if into the next year, or ‘This Fiscal Year to Date’ if working in the current year. Or you can just enter the dates you want (eg, 1/01/10 thru 7/31/10). Look thru the statement for ununsual looking balances in the accounts. Maybe there is $12,000 in Office Expenses. Double click the amount and you can check all the entries from 1/01/10 thru 7/31/10 or whatever date you’re working with.

There may be a new computer system in there for $3,000…you’ll want to alert your tax preparer about this as it needs to be reclassified onto the Fixed Asset Computer section of the balance sheet.

Also, look for expenses that may be ‘personal’ in nature. Weed any of these out and put them into the Draw account of your Balance Sheet. By double clicking the amounts it will take you the check or bill entry and you can reclassify it. If any are in doubt I set up an account on the Balance Sheet in the Other Asset section called ‘Suspense’ and put questionable items in there. You can discuss these with your tax preparer.

I have had a number of new clients that have come in with their Quickbooks file saying they only made $30,000 for the year only to find that they’ve been paying personal expenses, groceries, medical bills, home utilities, etc into P&L accounts. If they had $10,000 in personal expenses that have to be pulled out, their profit would jump by $10,000, throwing all their tax situation in chaos. It could have been avoided if these items were checked out and fixed before year end.

There are other things to be checked but are beyond the scope of this article, but attention to these will go a long way towards giving your preparer a much more accurate and streamlined set of books. When we get them like this, our time and your money is much better spent on tax reducing strategies as opposed to ‘clean up’ work.

If you need any assistance in working with your Quickbooks files or wish to do some mid-year or before year-end tax planning, please call Bob at (805) 264-3305.

Thank you, Bob

Robert W. Craig, E.A. Tax and Business Development Services
1444 Aarhus Drive, Solvang, CA 93463

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