5 Signs Your Books Are Wrong Before It Costs You

5 signs your bookkeeping is wrong

1. You can't read your financials in two minutes

Life is too short, time really does fly, and while detailed accurate books are great, numbers that are just detailed enough for your needs are exceptional.

That is why, at Westfront, if you cannot get a clear picture of your financials within two minutes of looking at them, too complicated.

Let’s be real, as a growing small business owner, you already have too much on your plate to put on an accountant hat every time you want to know how the business is doing. You should not have to dig through duplicated expense categories or messy contractor payments.

If you run your profit and loss statement and it looks like a two to three page essay, that is an essay, not a profit and loss statement.

Exceptional bookkeeping should let you quickly see the big picture first. Then when you have time or need more detail, the books should be flexible enough to let you look under the hood.

2. Missing bank and credit card reconciliations

Has it ever happened to you when looking at tables or numbers that, after a while, it all starts to look the same and your mind starts to betray you?

That is how missing transactions and duplicates sneak into your bookkeeping.

Bank and credit card reconciliations are what help make sure your financial statements are complete and every dollar was counted once.

You can quickly check this in QuickBooks Online by heading to the menu and clicking Reconcile.

3. Missing owner contributions & withdrawals

The profit and loss statement gets all the attention, but the balance sheet is where the bodies are buried. And for small business owners, one of the easiest places to check is the equity section of the balance sheet.

On the balance sheet, is where you find how much money you have put into the business and how much money you have taken out of the business. Think about it, those transactions need somewhere to live.

Look for these accounts at the bottom:

• Shareholder contributions & shareholder distributions
• Partner contributions & partner distributions
• Owner contributions & owner distributions

The names vary, but the idea is the same.

If you do not see any of these on your balance sheet, huge red flag.

That is a symptom of those transactions living in your profit and loss statement. Money you put into the business may be getting counted as income. Money you are taking out of the business may be getting counted as an expense.

4. Loan payments don't decrease liabilities

When was the last time you checked your outstanding mortgage balance? My guess is probably not recent enough.

And while you may not check your outstanding mortgage balance every year, bare minimum, the IRS does on your business tax return. Especially if your entity is an LLC taxed as an S Corporation or a multi-member LLC.

Also, if you ever want financing or want to convince people to invest in your business, creditors and investors will very much be interested in your liabilities.

This is why it is important to have accurate liabilities on your balance sheet. But you do not need to be an expert to know if they are right.

Run your balance sheet for the last 12 months, and if your liabilities do not change month over month, red flag.

This is usually a signal that the monthly loan payments have been accounted for as an expense, overstating your expenses on your profit and loss, and understating your income, which then understates your tax liability for the year.

If, however, there are payments reducing your liabilities, check to see if those payments are correctly split between principal and interest. If the transactions are going entirely to principal, then you are missing interest expense deductions and now you are overpaying taxes.

5. Bookkeeping doesn't match the return

Most small business owners think that they protect themselves against the IRS by paying a CPA to file a “perfect” return. But when the IRS questions your return, they don’t want to see your return. They already have it. They just don’t believe it.

So what does the IRS look for when they question your return? Your records. In other words, your bookkeeping. Despite this, to this day, I have not seen a new client come aboard with bookkeeping that matches what happens on the tax return.

If you run your balance sheet and check whether your total assets at the beginning of the year match the total assets reported on your most recently filed business tax return, I’ll buy you a coffee if they match.

Don’t you think that is interesting? Most business owners start bookkeeping for the same reason, taxes. Yet most books are never congruent with what happens on the return. The books exist because of taxes, but somehow, they do not match what happens for your taxes.

Awesome.

What each one can cost you

How to check your own books

You do not need to be an accountant to perform a basic bookkeeping check. Start with these five questions:

1. Can you understand your profit and loss statement within a couple of minutes?
2. Are all bank and credit card accounts reconciled through the most recent month?
3. Does your balance sheet show owner contributions and withdrawals?
4. Do loan balances decrease as payments are made?
5. Do the beginning balances in your books tie back to your most recently filed business tax return?

If you cannot confidently answer yes to each one, there is probably something worth reviewing before you rely on the numbers.