As you stare at your QuickBooks Online Profit & Loss or Balance Sheet Reports and see some things that look funky, but are not exactly sure how to go about checking your work I propose this checklist for what should be completed already, then how to check each report to identify some issues. This is a detailed process for how to get your books and bookkeeping finalized for tax preparation.
If you find this all a little overwhelming – please set up an appointment with me and I’ll give you a quote on how much it will cost for me to fix and finish up the reports for you. Likely the cost will be around $300 and can be done within a week of our conversation. Provided you are not reading this in March and its tax return chaos in our industry. 😉
This guidance is meant for business owners that are somewhat more familiar with QuickBooks and have done some of their own research on how to use QBO. This is not meant to be a starter guide. Please know there are a lot of starter videos and instruction available from both Intuit and from other bookkeepers on YouTube that can help. If you have some specific questions I recommend doing an internet search to see if something pops up that answers your questions.
What work needs to be completed before you finalize your reports:
Reconcile All Bank and Credit Card Accounts
Many clients believe that because you connected your bank and card accounts to QuickBooks and transactions import, and that you accept those transactions in the ‘Bank Transactions’ screen that everything is great. Reconciling confirms this work is accurate. In QuickBooks Online > navigate to ‘Reconcile’. If the work has been done you can review the “history” and look at the reports for each month that was reconciled.
If not done, then you should do so now. Collect all the months of statements for each credit card and bank account associated with the business. Intuit includes a video on how to do these reconciliations on these screens, and many very good accountants on YouTube have provided instructions for this step. I won’t teach you anything that they are not already covering.
I recommend you reconcile one month at a time, working through each account. For credit cards, reconcile into January of the next year, to cover all of December. Make sure that the total deposits and total expenses cleared in QBO agree to your statement. You can’t just clear it all, sorry. And please don’t click that “fix reconciliation” button. That button is nothing but trouble for you later on.
If you’ve never done a reconciliation and you have a lot of transactions – that might be a good time to have me clean it up to at least make your starting numbers for the tax year accurate. The 1.5 hours of time that will cost is worth your sanity.
What is really important here is that – If you have extra transactions, likely duplicates, that are left over after you reconcile – those transactions need to be deleted from the system. Leaving them in the books overstates income or expenses. If any transactions are missing, you will need to manually add those to match the statement.
Reconciliations for all bank and credit card accounts completed – lets clean up the balance sheet first.
Balance Sheet Review
Documents you will want to have on hand:
- 12/31/202x Statement for all bank accounts
- 12/xx/202x Statement for all credit card accounts
- 12/31/202x Statement for all business loans (vehicles, cash flow loans, etc)
In QuickBooks Online > navigate to the ‘Reports’ section and run a Balance Sheet Report. Most likely your account has this as 1 of 2/3 reports in a favorites section. Change the date to 12/31/202x so you are reviewing it for the year end. Then click the bubble for “Cash” and click Run Report. (of note – You are most likely a cash basis taxpayer if you are reading this tutorial. Your last tax return will show this detail if you want to confirm).
Pro Tip: Its worth saving this report saved using the green “Save Customization” to the ‘Custom Reports’ tab of the Reports as you make changes and re-run the report. Also helpful is opening each report into a new tab in your browser. Keep the report on one tab, drag the tab away from the browser so you can view side by side your QBO report and the menu to take actions.
I work top to bottom on the balance sheet.
Bank accounts. The balance as of year end on the statements will very likely be the same in QBO if you did the reconciling accurately. If they are not the same – you need to figure out what is entered into QBO that is altering the balance.
Accounts Receivable. If you are seeing this, then you either a) didn’t run the report as Cash Basis, or b) you have errors in the payments you have applied to invoices. That’s a different tutorial on how to fix. If I don’t have it on the website yet, someone on YouTube has a video on ‘How to fix Accounts Receivable in QBO’.
Fixed Assets. Look for the bottom line that says “Total Fixed Assets”. Click on the number in bold, and it will open a transaction report showing every entry into the fixed assets. What shoudl be in assets is only the full cost of any purchase of assets that cost more than $2,500 in total and will be in use more than 1 year. If you see individual payments for a purchase, or smaller purchases of less than $2500 – those will all need to be moved to either the liability account of the loan or an expense account. Again – another tutorial by me or on YouTube is recommended on ‘How to enter fixed assets into QBO’
Accumulated Depreciation. This is the total of all prior year depreciations. It should match your last filed business tax return. There is usually a report in your tax return showing the Regular Depreciation and what the total of all prior and current depreciation is.
Other Assets. You probably will have nothing in this area. If you do – look at the details making up this number (click on the numbers, a detail report opens) and decide if you meant them to be expenses, or if these are correct per some prior entry you recorded.
Now we’ll move to the liability section of the balance sheet. Half way done!
Accounts Payable. If you are seeing this on you balance sheet, and you did indeed run it as cash basis, then you have not entered payments made against bills entered in QBO accurate. That too is a separate tutorial, available either on this website on another creator on YouTube.
Credit Cards. Similar to bank statements – the account balance on the balance sheet should be similar to the amount reconciled to from the card statement. Remember that the card statement ending balance is usually not the month end, so some variance can occur.
Liabilities. Hands down this is 10,000% the most likely place that you are going to mess up and miss really good opportunities to record legit business expenses. Videos on YouTube or on this site are a great investment in understanding what makes up liabilities and how you record them.
Sales Tax Liability – this number should only be the amount of what you are actually still needing to make a payment to a tax agency for, and was due as of 12/31. If there is any difference, and you have already fixed your bank accounts in the previous steps, then you should probably make a journal entry to adjust this liability. I typically adjust this number to an income account, such as ‘other income’.
Payroll Tax Liability – this number should only be the amount of what you are actually still needing to make a payment to any of a variety of tax agencies for, and was due as of 12/31. If there is any difference, and you have already fixed your bank accounts in the previous steps, then you should probably make a journal entry to adjust this liability. I typically adjust this number to a payroll expense account, such as ‘payroll tax expense’ or ‘payroll expenses’.
Vehicle loans – you need to get the statement closest to December 31st, and first off make sure all the payments made during that year are recorded in the loan register. If you are missing any – its quite likely they are recorded as auto expenses, and that is not accurate. Move them here, then proceed. With all loan payments in place, you can now record the total interest expense for the calendar year, increasing the loan balance to what the statement shows is still owed on the loan.
Bank, SBA, Mortgages and other Loans – same as vehicle loans. If you are missing any of the monthly, or daily, payments you will need to go hunt down where those payments were posted so you can move them back here. Then record the annual interest and confirm that the balances are
Loans to Shareholder. Please research what this means, and if it showed up after a tax return and you don’t understand why – please ask your current tax preparer why. And if that tax preparer is me, I’m going to ask that you don’t touch this account for now. It will be addressed in the tax prep.
Equity. This is the section showing the net effect of all your prior years of business activity. All the business net income, owner distributions and contributions.
Owner Distributions (aka Draws or Owner Pay) – Click on the Total number, and review all these transactions to ensure they are personal expenditures and not business expenses. If legitimate business expenses, move them to the correct expense account on your P&L.
Pro Tip – STOP buying personal stuff from your business account. Transfer money weekly, bi-weekly or monthly to your personal checking and let that be the only way you transfer money to yourself. Much, much easier to account for.
Owner Contributions – Money contributed by the owner into the business, to help with cash flow. Review these transactions to insure actual sales or income items are not accidentally posted here.
Retained Earnings – should have very little to no activity AFTER Jan 2nd of that year. On Jan 1st all the owner distributions and contributions are typically rolled up together into this RE account, to equal the amount that is your owner basis in the business at year end. If you have not done this, then you make a journal entry as of 1/1 of that tax year the total for the prior year owner distributions to make that owner distribution account zero as of 1/1 and the entire amount gets added to the retained earnings account.
And that’s the Balance Sheet review. If you feel like you were hit by a truck and want no part of this cleanup, the link to my calendar is at the top of the website.
Feeling good, like it’s starting to make sense? Awesome. Carry on to the Profit & Loss.
Profit & Loss –Review at Year End for Tax Preparation.
Documents you will want to have on hand to review your P&L include.
- If your sales are outside of QuickBooks (Stripe, Square, Amazon, etc) run a Gross Sales Report for entire year from that system. Try to have any sales tax collected shown separately. If needed, you will want to add up all your sales.
- ALL Forms 1099-NEC and Forms 1099-K you received for work your business did for others. Log into sites like Amazon, Etsy, Stripe, Square, etc to see if they issued any.
- A copy of the 1096 and Forms 1099-NEC you issued to contractors.
- If your payroll is ran in software outside of QuickBooks, or was not ran in QuickBooks for the entire year: You will need your Payroll Form W-3 and Forms 941 for all 4 quarters, as filed. If not filed yet (typically these are filed at the end of January), then the 3 quarters of Form 941 will be sufficient, and a payroll summary for the entire year will work.
In QuickBooks Online > navigate to reports > Find the Profit & Loss report. Run the dates for the entire tax year, and click the ‘Cash Basis’ tax return bubble. Click Run Report. Save this customized report if you want to easily come back to it.
Sales & Income – first step is total up all those Forms 1099-NEC. This is only a significant factor when you don’t have a lot of clients, and most of your income comes from one or two companies. Your total Income cannot, under any circumstance, be reported as LESS than the total of those 1099 – NEC’s and / or 1099-K. The 1099-K shows what you were paid via credit cards by clients.
The next step is to review your sales totals reports to make sure that number is close to what you show on your P&L. If there is a difference where QuickBooks shows a greater than 10% less income than the outside sales report is showing, I would highly recommend you seek some professional help from someone like me or your tax firm to fix that.
Now, lets looks at the Expenses.
Costs of Goods Sold – are expenses, and typically I don’t care whether you use COGS or Expense accounts if you are a newer business tax filer. We figure it out.
Contract Labor – You should have either a COGS or Expense account that is ‘Contract Labor’, ‘Contracted Services’ or ‘Outside Services’. Typically those 1099-NEC’s you issued are primarily shown in this account.
One of the most frequent questions clients asked is about ‘what category should I put this expense in?’ and I will tell you that if at this point your balance sheet is accurate, then it probably doesn’t matter much. They are almost all deductible in the same way for tax purposes. There are a few specific accounts that have a different tax treatment and we’ll handle those next.
Most of the ‘treated differently for tax purposes are found in IRS Publication 463 about ‘Travel, Gift and Car Expenses’. You can find this on the IRS.Gov website. When you sign a tax return you attest that all your business expenses, but specifically these 3 expense accounts are accurate and you understand the tax law surrounding them. I recommend you research these items, and ask your tax preparer any questions to clarify.
Auto Expenses vs Auto Mileage – if this is not your first year filing a business tax return, then you have already established an auto expense or auto mileage precendence. Look at your last tax return, or ask your tax preparer what your protocol is.
If you are doing auto mileage, then you will need to calculate your business miles for the year that you drove, and multiply that by the IRS Mileage rate for the tax year. The ONLY business expenses related to your auto are parking and tolls you incurred driving for work – those are still business expenses. No actual expenses such as gas, auto repairs or auto insurance for the year should be left on your P&L. You will need to reclass those to Owner Distribution.
Entertainment – No entertainment expenses are deductible at this time on Federal and most state business tax returns. Review the rules so you know what is entertainment versus what is advertising expenses.
Meals – Typically I see 50% deductible expenses. I strongly recommend you review the difference between 100%, 50% and 0% deductible meal expenses. Also know there are some specific record keeping requirements on meals you should work on making a part of your process. Any meals that you decide are 0% and were for personal use only, those can be classified as Owner Distributions.
Bad Debt – Please know that a client not paying an invoice is not bad debt, but instead its just never going to be income. Typically you only see true bad debt when a payment from a clinet is returned by your bank and you never get paid again. After you chase that client for a bit then give up – you write off that never recovered payment as bad debt. We don’t see this as much anymore with debit and credit cards being used as much as they are.
Insurance Claim Proceeds – If your insurance company pays your for any reason – a vehicle damage claim was paid; they reimbursed your for some other expense then those proceeds are very typically not taxable. Your tax person needs to see a VERY specific account created as an Other Income account that has the words “Insurance Proceeds” or “Insurance Receipts” in it so they know to report it, but not make it taxable income.
Payroll Expenses – When I setup a client’s chart of accounts I have at least 3 payroll accounts:
- Payroll Wage & Salaries Expense
- Payroll Tax Expense
- Payroll Processing Fees
You can mirror this setup, or work with what you have. I am going to proceed as if you are using this setup. If you have your QuickBooks setup to pull in your payroll expenses from your payroll processor (Gusto, ADP, OnPay, PayChex).
I typically will change how this annual P&L report is displayed from the one total column to quarterly totals so that I can match it to the payroll reports that were filed. Line 1 of your form 941 showing taxable income for each quarter should agree to the total of ‘Payroll Wages & Salaries Expense’ in QBO. The total of all 4 quarters for the year shoudl equal box 1 of your form W-3. Please note the IRS will confirm the Salaries line reported on your income tax return to your payroll tax returns. Which is exactly why I double check these numbers.
Payroll Tax Expense is what the business paid to the IRS and state tax agencies. The business payroll tax expenses includes the business portion of FICA taxes, FUTA (Federal Unemployment) and SUTA (State Unemployment). The other portion that you withheld from the employee paychecks and paid into the tax agencies is captured on the salaries line in total wages and salaries. To see if you are close, you should be able to multiple your ‘Payroll Wages & Salaries’ number by .08 (8%) and that result should be close to this number on the Tax Expense line.
Payroll processing is typically what you paid to your payroll company for running your payroll. If you don’t want this fee shown separately you can use another like ‘Outside Services’, ‘Professional Fees’ or even ‘Office Expenses’.
Depreciation Expense – This will usually not be on the P&L you give your tax preparer. When your tax preparer finishes your return you can either ask them for this number or find it on the Regular Depreciation report.
At this point, I would be very unlikely to care if you have something posted to ‘Advertising’ that is in my opinion more ‘Office Expense’. It isn’t a big deal, doesn’t reduce its tax deductibility. You handle your bookkeeping how you want, and if you use those P&L reports, as you should, to make business decisions and keep an eye on growth then you are choosing accounts that make sense for you.
I would recommend you do a final review of the totals in each column looking for any irregularities. Is one of the expense accounts a big negative? Then you did something wonky and likely should look at the detail. I will see this when a sales item was posted wrong, or a refund was issued for a purchase and the purchase was put into another account. So if you bought an $1800 computer from best buy and booked the original expense as ‘Office expense’, the corresponding refund should also go to ‘Office expense’.
Other Income & Other Expenses – There is rarely any transactions posted to accounts in these areas of your P&L. Review the detailed transactions and if they should be moved, do that, otherwise if they are accurate to be left in this odd section, then do that.
That is mostly what I would recommend you address to clean up your year end Profit & Loss report for tax prep.
