… or “Professionally Prepared Financial Statements”

Whenever we discuss the price of preparing a Corporate or LLC/Partnership tax return, the concept of “tax return ready” financial statements comes up.  As accountants and bookkeepers, we can play one of two roles (or even both):

  • Prepare Balance Sheet and Profit & Loss report “tax return ready”
  • Prepare tax return from those financial reports

Now, lets define what “tax return ready” financial statement means, and this is within the context that there are being prepared from QuickBooks:

  1. EVERY line item in the balance sheet (at least the TOTAL ASSETS) for last reporting period, for example 12/31/2016 matches the Tax Return’s Schedule L (Note 1: that some companies with less than 250k in sales and assets, are not required to report a Schedule L balance sheet. Note 2: Single-Member LLCs and sole proprietors filing in a Schedule C of their personal returns will not have a Schedule L to compare it to, unfortunately, this exercise will not be possible; this case, compare the Net Income of the reports vs. the net income in the tax return to see how accurate it is)
  2. The report is in the correct BASIS (Accrual or Cash) based on the taxpayers basis of choice for tax returns.  This is particularly important for evaluating the accuracy of Accounts Receivable, Accounts Payable, and Inventory Assets
  3. All Bank Accounts, Credit Card / Loan Accounts must be reconciled at least thought the to closing period.  Any uncleared transactions in these accounts should be deleted, voided, or reversed; UNLESS they do clear within 90 days of the closing period and/or are dated more than 90 days old
  4. Accounts Receivables should be ZERO if you are a cash-basis tax payer.  But, if you are an accrual-basis tax payer; make sure that all old/uncollectible open invoices have been properly written off  to Bad Debt during current period. The Accounts Receivable Aging Summary report should help identify these.  Usually adjustments to Accounts Receivables would affect your Sales/Revenue\
  5. Inventory quantities on hand should tie to the last physical/cycle count performed.  Inventory Valuation Summary report should show total inventory asset value to match Inventory Assert account in the Balance Sheet.  Additionally, there should be NO inventory items with a negative inventory quantity on hand!
  6. Beginning balances of net Fixed Assets (original cost minus Accumulated depreciation) tie to the Fixed Asset Schedule from the previous year’s tax return.  And NO depreciation for the current year should be booked
  7. All other assets and liabilities represent an actual item of value that you OWN or OWE
  8. Accounts Payable should be ZERO if you are a cash-basis tax payer.  But, if you are an accrual-basis tax payer; make sure that all  open bills that will not be paid to a vendor have been properly written off  against their originally used expense or cost of goods sold account. The Accounts Payable Aging Summary report should help identify these.
  9. All PERSONAL expenses for owners/partners are inside the dividends/distribution accounts (or any EQUITY accounts)
  10. All capital contributions or dividends/distributions are in the Equity section of the balance sheet and labeled per owner/partner (if multiple)
  11. The Profit and Loss report “makes sense”; which generally means that there are no redundant categories, no negative amounts (unless is to record refunds or debit adjustments to income)
  12. Make sure that the gross profit percentage (margin) ties to your understanding of what the margin % should be for your company and close to industry averages.  If this doesn’t seem right, there maybe some expense accounts are supposed to be Cost of Goods Sold accounts and viceversa… or there are some misclassified transactions that should or should not be in the COGS category. Also, make sure that there is no income transactions hidden inside and netting expense/cogs accounts or expense/cogs transactions inside of income accounts
  13. All payments to individual independent contractors (of $600 or more for the year) tie to 1099-Misc forms
  14. Payroll Expenses are property separated into: Officer Compensation, Other Gross salaries, Payroll Tax Expense, Payroll Processing fees, and Fringe benefits… and all tie to Payroll forms such as W-2/W-3, 941’s, 940, and State/Local Payroll tax forms
  15. Expense categories that have special treatment, such as: Officer Health Insurance, Officer/Owner Life insurance, Charitable contributions, Political Contributions, etc… need to clearly stated as OTHER EXPENSES
  16. Payments to loans are properly being amortized (principal and interest) instead of hitting an expense category
  17. There are no payments to owners in the Profit and Loss report (unless they are related to a reported W-2 payroll or a reported 1099-Misc payment)

 

Call us to make an appointment to help you get this done professionally so you can give it to your CPA “tax return ready” and/or if you need us to prepare your taxes as well! Phone: 954-414-1524 or email: info@quickbooks-training.net

 

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Call us to 954-633-2718 or email: hector@quickbooks-training.net