The short answer is, you probably will not… In accounting “Accuracy” is not even part of the principles of accounting; anyone using the accurate is using a completely subjective term.  However in accounting we do have financial audits, and upon completion, the auditor will issue an unqualified opinion stating that the financial statements are “in conformity with Generally Accepted Accounting Principles” and are “free of material misstatement”.  Both of those statements imply that the financial statements are fairly stated.  Which means that a 3rd party as some assurance about “accuracy” can rely on the information presented for investment decisions.

So the answer to the question: “How can I know if my books are accurate?” is You need you financial statements to get audited and receive an unqualified opinion for a certified public accountant

Now, onto reality… Most small businesses cannot afford to pay a CPA for an audit (audits range from $5,000 to $25,000 for most small businesses); so instead they opt for a lower level service from a CPA such as a Review or a Compilation; both services are significantly less expensive than an audit and they do help the small business prepare more “accurate” financial statements, giving the 3rd party users of the report limited or no assurance.  However, In most cases the users of small business financial statements tend to be the owners/partner of the business and the tax accountant, which means that accuracy really just means that the tax return will pass muster.

That being said, in these cases, a better question to as is:

How to a make sure my books are “Tax Return ready”?

In a nutshell, “tax return ready” means the following:

  • The beginning balances of every asset and liability account from the previous tax return (i.e. as of 12/31/2016) match in your accounting system.
  • The ending balances of assets, liabilities, and equity/capital for the current year closing (i.e. 12/31/2017) make sense and match the true reality of all the components of value that the business owns (assets) and owes (liabilities).
  • All banks, credit cards, and loans from banks or financial institutions RECONCILE, which means all the transactions in each account (debits and credits) match what the bank or financial institutions have.
  • Only tax deductible expenses are recorded in the books or the non-deductible expenses as clearly identified and grouped, so the tax preparer can exclude them from the net income calculation
  • The reports are property prepared based on accounting basis:
    • Cash basis implies that all payments from customer during the period are income and all payments to vendors during the same period are expenses; regardless when the the income was earned or expenses were incurred.  There should be no customer deposit liabilities, no vendor prepayment asset, no accounts receivable, no accounts payable, and no inventory (in most cases) recorded in the books
    • Accrual Basis actually only recognizes income when earned and expenses when incurred, regardless if payments are made during the period. Under Accrual basis all payments in/out not pertaining to earned income and incurred expenses for the period will affect the balance of accounts receivable, customer deposit liabilities, accounts payable, or vendor pre-payment asset… and inventory is accounted for, so only inventory SOLD becomes an cost.
    • Hybrid Methods will actually take parts of each of the two methods, there are no specific rules around who can or cannot do a hybrid, but it must be consistent and well documented
  • Other important items such as depreciable fixed assets, amortized other assets, officer loans, etc.. have special rules (consult with your tax pro)

This article goes into the details about Tax Return Ready financial statements 

 

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