All too often, I have taken over bookkeeping for clients whose books are in complete disarray for the current and previous tax years.  The issue is further compounded due to tax returns having been filed for those same previous tax years that are in current disarray.

There can be a multitude of reasons that the bookkeeping was maintained without adherence to any standards of value or integrity, but excuses don’t fix the problem.  The important point at this juncture is the client now understands his dilemma, wants relevant and reliable financial statements, and is willing to spend some time and money to get his bookkeeping cleaned up and back in order.

I have come up with some quick bookkeeping cleanup advice to help you close out (or at least tie a knot in) the bookkeeping from your previous tax years:

• Find out if the previous tax returns have been filed under an accrual or cash-based method.  If there is a concern about keeping the previous years’ bookkeeping in your financial database (such as QuickBooks) intact (and eventually locked), then understanding the difference between accrual and cash-based reporting will determine HOW you make your adjustments to catch up important tracking functions such as your Accounts Receivable and Accounts Payable balances (at the customer and vendor levels).

• Catch up and Reconcile your cash and credit accounts to the beginning balances of the new tax year.  This can be done quickly by using journal entries to enter the monetary difference (for each account) to catch up to the balance of the cash and credit accounts as of the beginning of the tax year (which for most people will be January 1^st).
  • When using the journal entry method to catch up bank accounts, be sure that all checks written in the previous year have been reconciled first.  Otherwise, you will have to keep re-reconciling a bank account as the checks clear because you would have already cleared out these un-cashed checks using a quick journal entry to catch up AND reconcile the bank account thru the end of the previous tax year.
  • The journal entry method is best suited for clients whose books (in the financial database that will be utilized going forward) were probably never reconciled, the tax returns were already filed, and the client does not want to spend a lot of time and money to reconcile each month of the previous tax years.

• Try to clean up your Accounts Receivable and Accounts Payable at the customer and vendor level.  Never use journal entries or make other company-level entries to catch up these two accounts.  This is because Accounts Receivable (AR) and Accounts Payable (AP) are really just temporary holding accounts and are ALWAYS tied in to list names (customer and vendors) in your QuickBooks database. Closing out AR & AP accounts at the company-level will NOT clean up any of the corresponding reports that draw information from these accounts.  Your AR & AP reports will still have the exact same irrelevant information if not properly closed out one customer and one vendor at a time.

• Try to clean up your inventory stock statuses one product item at a time.
  • Like the AR & AP accounts, NEVER use journal entries to catch up inventory accounts. Clearing inventory statuses using journal entries will result in the financial value of your stock status report never matching the inventory asset account in your balance sheet.  This anomaly will definitely be caught in the event of an outside audit.
  • I recommend performing a physical count of your inventory as often as possible and reconciling your stock statuses no less than once per month. This becomes especially important at the end of the tax year.

• Check your Equity Accounts.  These are the most often overlooked and probably the least understood accounts.  One of the most popular Equity Accounts is a QuickBooks account called the Opening Balance Equity (OBE), which is really just a temporary holding account.  It has most likely been used as a dumping ground for beginning balances or other financial transactions that just didn’t seem to fit elsewhere at that time. Try to close out the OBE account when you can and try not to use this account again.

• Be sure the Undeposited Funds account is zeroed out.  I have seen too many times very old customer check payments in this account that never cleared. This can cause some of your income to be double-reported and your Balance Sheet to be inaccurate.

• Run a Balance Sheet Report in both Accrual & Cash Based Accounting Methods.  Look for accounts on this report that don’t seem right or don’t seem to fit in now.  Also look for accounts that have negative balances here.  These are red flag indicators that something is probably amiss and needs your attention.

Be vigilant about bookkeeping cleanup and thus keeping your books accurate.  Your books provide the basis for your company’s financial health reporting as well as information that guides the future financial decisions you make for your company.

Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.