Author's Follow-up: Sorry folks, at the time I prepared my article below for publication I was not aware that 'QB Talks' was in the process of changing the topic for this month to something other than the 'Data Clean-up' topic that was scheduled. May's QB Talks will now feature Ted Callahan discussing the topic of QB Live Assisted Bookkeeping. (Correction posted 5/10/2024) -- see full description HERE
This month’s QB Talks is all about recognizing and cleaning up data problems within QuickBooks. While not everyone follows the exact same steps in the exact same sequence, and what Alicia Katz Pollock will teach you during QB Talks may be somewhat different than the content in this article, I wanted to help you get ready for next week’s webinar by covering what I view as one fundamental basic.
While it is done less frequently by QuickBooks users who don’t have regular interaction with their accountant, bookkeeper, or ProAdvisor, balancing your books against the most recent tax return is fundamental to having a healthy set of books. Many businesses send their accountants a copy of their QuickBooks file or financial statements for year-end too get their tax return prepared. However, once the tax returns have been prepared, they don’t even consider making their books and the tax returns match.
Their accountant may even send them journal entries to reconcile the financials with the tax returns, yet they never enter those entries. Then, at the end of the following year, the accountant must make those entries to balance before considering the end of the most recent year. Sure enough, the entire process is repeated all over, year after year, without learning the important lesson of 'balancing to the tax return.'
Both QuickBooks Online Accountant and QuickBooks Accountant/Enterprise Accountant have tools that can assist you in reviewing the opening balances for the year just ended and then identifying discrepancies based on what the tax return shows.
I almost always begin by reconciling the bank statements for the year/period end, even if the user has performed a bank reconciliation. You may think that ‘Bank Feeds’ has ended the need to perform manual reconciliations, but nothing could be further from the truth.
Remember, QuickBooks lets you force a reconciliation to balance. It doesn’t matter if the actual bank balance is proper if there had to be a ‘forced match’ balancing transaction made to QuickBooks that doesn’t tie out to an actual transaction. This is one possible reason why the Balance Sheet itself won’t match the Balance Sheet in the tax return, because that extra transaction forced onto the P&L will likely change the ending period Net Profit and therefore the Balance Sheet and the Income Statement.
Most QuickBooks users who have never used a more sophisticated accounting system or who never did ‘the books’ the old-fashioned way with paper journals and ledgers rarely reconcile anything on their Balance Sheets other than their Bank Accounts and Loans. Since they aren’t reconciling every Balance Sheet account, they genuinely have no way of knowing if each account is in-balance at year/period end.
We rarely hear horror stories of balance sheet accounts being out of balance within QuickBooks Online, nor do we see QBO users reporting their entire Balance Sheets being out of balance in which their Assets do not equal Liabilities plus Equity. But, it hasn’t been that long ago since these two irregularities were not uncommon in QuickBooks Desktop, especially when Inventory was involved.
However, it is possible for the QBO Balance Sheet to be out of balance. Below is an example of a QBO file with a $1,460.00 difference between Total Assets and Total Liabilities and Equity. You would think a person would have a hard time not seeing this, but "anything is possible."
An "out-of-balance" QBO Balance Sheet.
Often, be it QuickBooks Desktop or QuickBooks Online, users overlook or ignore this problem until they are slammed in the face with it.
I once had a client who, only after six months, recognized that they had an out-of-balance balance sheet. Sure enough, their month-end Balance Sheets for six months had been out-of-balance every month. When I asked them why they hadn’t called me sooner, they said, “I had no idea such a thing could even occur; how can a balance sheet be out-of-balance?”
In my mind, I asked myself, “How can a trained bookkeeper not recognize an out-of-balance balance sheet for six months in a row?”
You should reconcile every account on the balance sheet for each period end. If you don’t formally close each month, then at least quarterly, and if you aren’t going to do it quarterly, then no less often than mid-year and end-of-year. But I wouldn’t be handing out copies of my Balance Sheet to anyone, representing them as reflective of your business or client's books. I can think of nothing that would ‘turn a Banker off’ more than looking at a Balance Sheet and recognizing that it was ‘out of balance.’
I could probably spend another 700 words talking about nothing more than Balance Sheet irregularities and their causes. But I’m confident that Alicia will cover this in the QB Talk next Wednesday, May 15, 2024, at 2:00 PM Eastern Daylight Time.
If you are already signed up for the QB Talks series, you should either have the log-in information in your calendar, or have or soon will receive your ‘reminder/invite.’
If you’ve never registered for QB Talks, you can do so HERE.
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