How To Know If Your Books May Be Inaccurate


At Tax Planner Pro we are all about finding ways to save money on taxes. But what you may not know is that we are BIG believers in the old tax saying: “Bookkeeping is the tax man's best friend”. 

It means that if the tax man wants to find money for you to pay in taxes, usually he just needs to review your bookkeeping and he will find it...

When errors, inaccuracies, falsehoods, and problems exist in your bookkeeping, the IRS will have no problem running a simple audit and you will pull out your checkbook.  In order to be bulletproof in your tax returns, you must be enthusiastic about your financial statements and their importance.

In fact, if your bookkeeping is sloppy and poorly kept, even Tax Planner Pro will have a hard time helping you because it uses the information in your bookkeeping records to decide what tax strategies to offer and inform you about.

I want to show you some of the ways I review bookkeeping in our CPA firm and what you can do to at least identify problems, and in some cases how to fix them. Obviously reviewing financial statements is not the kind of thing I can teach fully in a blog, but I think I can show you ways to know if you are in need of more help and review.

Common Bookkeeping Errors

When I get a clients set of books for the first time, most of my staff will go right to the Profit and Loss (otherwise known as the Income Statement). This is where you will find all of the revenue and expenses, and it is probably the most “interesting” part of the business financials. If you review your financials, most of the time the P&L gets all of the attention.

However, if you want to really review your books, don't start there. Instead, start with the Balance Sheet (BS). 

This is the report that will show you at any given moment what your Assets, Liabilities, and Equity is. The reason I start with this report is the same reason most savvy auditors do, because you can very quickly see if the books are on the right track.

The scan is simple:

1. I look for any amounts on the BS that are negative.
2. If I find a negative amount, if it is accumulated depreciation or in the equity section     that could be normal. If it is  in any other account, I need to investigate.

As I said, most of the time I will find a bank account with a negative amount, a loan amount that is negative, or accounts receivable that is negative.  In most cases that tells me there is a problem.  99% of the time, those accounts should be positive.

So lets say you have a negative amount. What should you do about it? 

Well, the short answer is nothing yet. Make a note of these items and go over to the P&L.

On the P&L I do another scan, again looking for negative amounts. The P&L really should not have any unless you have specific accounts that are meant to be negative. 

An example would be customer returns or something (although I can make a case that those should be handled differently, as a subtraction from revenue).

This may seem confusing because a P&L is income and expense, so aren't the expenses the negative? 

No, the system knows that expenses are subtractions, but it will still present all the amounts and positive numbers.

Lets say you have an account called “Office expense” and when you run the P&L it is showing a negative amount. What that is really saying is you have no office expenses and in fact there is some kind of deposit booked to Office expense. Generally that would not happen, so that is evidence that more research needs to be done.

After we search for negative amounts on the P&L, we start to see if some more advanced work has been done. For instance, if you own fixed assets, we look to see if they have been capitalized on the BS and if you are depreciating them on the Income Statement.  If not, that is a problem.

Also we check to see how your payroll is being booked. If you run payroll for officers and employees, we like to see that broken out if you are an S-corp. That is needed on the tax return, so if it is all lumped together we may need to change that.

Is there a large account with more than 3% of your expenses in it called “Miscellaneous”, if there is, that may need to be broken down into a more descriptive category.

Once we have completed these scans, we go to the biggest self prepared bookkeeping problem there is.......

The Bank Rec.

Bank Reconciliations

If I had a wish for every small business out there, it would be that their bank reconciliations magically happened for them each month. It would cut down on so much pain for them later. 

The small business owner has no time for these things, too much to do in running the business.

And that is what Mr. Tax Man hopes for. 

A set of books that has not been reconciled is like a wounded animal, there is hope but the odds are getting worse of getting out alive.

Really the bank rec is a simple idea: Use the bank statements to verify that all activity in the bank is also in the books. This verification makes sure that bank balances in QBO match the bank (what is also called “Tie”) and once you know that the case matches, bookkeeping in most cases just comes down to classifying things correctly.

On the other hand, if your bank balances do not “tie” to the bank statement, that can mean that your books could have revenue missing, expenses missing, children missing, body parts missing- you get the idea. It is bad, and the Tax Man WILL TAKE ADVANTAGE. 

See how bookkeeping and taxes all “tie” in together. This is a big deal...If the bank reconciliations have been done, then good. If they have not, we stop everything and complete those. Without those there is no need to work on other errors.

The Detailed Review

Once all of that work is done or documented, the last review we do is called the “Detailed Review” and it is just what it sounds like. We go into every account (both balance sheet and P&L) and review what is in each account. You will be amazed what you will find here, especially if you have another employee or co-worker doing most of the bookkeeping.

What you are looking for are vendors and other transactions that are misplaced. Like the utility bill being under salaries, or the check to your attorney being coded to meals and entertainment. Correct anything you find in these accounts.

During the detailed review, also make notes of what you don't know how to fix. This is going to eventually be the list you show your accountant or if you don't have one, possibly send to us if you are a Tax Planner Pro client and we will help you figure it out.

Also during the detailed review, make sure there are not personal expenses in here. Tickets to the movies, bathing suit purchases, cigarettes, whatever- don't have them in here. Code them to owner draw or shareholder distributions and going forward use a personal card or check for these. No need to clutter your business books with personal spending if you don't have to.

How Do I Know If I Need Help?

If you have had some accounting in school, or you go online and take the time to learn about it (lets say 10-15 hours of good intensive training) then most of this you may know how to fix.

However, if everything you just read sounded like hieroglyphics and the Charlie Brown teacher saying “maaww maw, ma ma...” then you want to get some help. I love Intuit and QBO, but simply having the right tools does not make you a carpenter (or an accountant).

Here are some real warning signs it is time to find some help:

Bank Recs have never been done and you have no idea how to do them.
Bank Balances are negative by thousands of dollars
Accounts Receivable is negative
No idea how to handle fixed assets and depreciation
Pulling money out of the business (for you to use personally)is shown as an expense
Or generally no idea how to fix the issues we have discussed in this blog
If you are in one of these situations here is what you do:

1. Don't fret and worry, everything can be fixed and you need to focus on running the business

2. If you have an accountant you work with for taxes or payroll, ask them what they suggest

3. If you don't have an accountant at all, reach out to us at Tax Planner Pro via email:

If you reach out to your accountant, in most cases they will want to help. Keep in mind that your accountant may not do the work themselves, but they can help you find a smart and trustworthy financial accountant that can get you squared away.

If they do not want to help (and this is a warning to all accountants out there who care about taxes more than books and won't help) then it is time to find a new accountant.

If you don't have an accountant or your accountant will not help you and you contact us, we have a network of accountants we can recommend or if we know the solution you need to implement we can show you how. 

Either way, don't hide from these problems. Get them fixed. You will sleep much better at night and we will be that much closer to thwarting our IRS nemesis...

No More Defense Tax Man!!

Christopher Ragain

My name is Christopher Ragain, I am the founder of Tax Planner Pro.  I love helping small business owners find creative and legal ways to beat the TaxMan.  My team and I love to write and you can find all of our insights on this blog!

Related Posts

Stay in Touch

Thank you! Your submission has been received!

Oops! Something went wrong while submitting the form