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How to improve reporting & inch your firm's accounting records closer to perfection

We spend a lot of time helping construction companies using QuickBooks get their books in order, and we see a lot of the same mistakes over and over again. I often tell business owners that QuickBooks is a software program, not a substitute for an accountant or experienced bookkeeper. In fact, using the software without some understanding of accounting can be more difficult and more hazardous than you would think — it’s not just a push of a button.

There are very real consequences when things go awry. It's pretty typical for us to encounter someone wanting “a little help.” We usually hear from them when their tax preparer takes a look at what is going on, or about 3 to 4 months after they try to set up and use QuickBooks on their own. Their frustration is real. Intuit has simultaneously helped and hurt their customers with their “anyone can do taxes and bookkeeping” message.

The concepts of “not knowing what you don’t know” and “what you don’t know can hurt you” are both applicable in these situations. Business owners setting up and using QuickBooks on their own are often stunned to find out from their accountant that their books are a real mess and need to be cleaned up. The price tag to do so can be even more shocking.

 

 

As construction business owners, we have all experienced the building owner or homeowner that thinks they can do the job better and cheaper on their own, knowing they don’t have the knowledge or what it truly takes to do the job being bid. QuickBooks work and construction are similar, in that fixing a mess and possibly having to demo and start over is usually much more costly and time-consuming than starting fresh with a plan using experience and knowledge.

A good foundation in your books, like when building a structure is key. Running a successful construction business and keeping good books have another similarity and that is that the devil is in the details. Details matter, a lot. The initial QuickBooks set up is so much more important than most business owners realize, as is getting periodic checkups from professionals who have QuickBooks experience and accounting knowledge. It’s never fun to tell clients they are making mistakes, or that their books are a mess.

In fact, it takes an unusual kind of person who appreciates and even enjoys looking at shiny, clean books. Knowing what really good, organized books look like has a lot of value. Finding someone who can appreciate this and make this happen in your company’s QuickBooks can save lots of money, time and aggravation. Your tax preparer will love you for handing over tidy books and possibly even be happy doing your taxes and may even charge you less.

Even if you don’t make these mistakes yourself, but are interviewing a new bookkeeper, knowing what to look for will be an advantage in getting your books closer to perfection. Here are 10 symptoms that indicate you may need guidance when using QuickBooks:

  1. You have a balance in your Undeposited Funds account, when it should be zero. I have had clients that have had 10 years’ worth of these transactions in this account, sometimes in the millions of dollars. This is not good. The problem really gets serious when the funds are left in the account and the person doing the books doesn’t see the deposit in the bank register. Often, they will then go in and manually add the deposit to the register classifying it as sales so that the bank statement and QuickBooks match. Now, income is overstated, taxes are incorrect, and you are making decisions on incorrect data.
  2. Your income statement, also called a Profit and Loss, is many pages long with many detailed sub-accounts. You may want to see all of the most detailed charges, because, after all, it all adds up, right? However, there are better ways to track and analyze costs and expenses. Job costing, when done correctly in QuickBooks can be the difference between success and failure, especially in the construction industry.
  3. You have your personal checking and credit cards in your QuickBooks because you want to classify your distributions and contributions. Legally you could be putting yourself at risk by co-mingling business and personal funds and transactions, which is an entirely separate article/topic, so you don’t want to do this. From a bookkeeping perspective, it’s much cleaner not to have your personal and company accounts in your books. If your business were to get audited by the Internal Revenue Service (IRS), would you really want your personal information right there? Less information and entanglement between business and personal is the way to go.
  4. You don’t use the credit card type account to classify your credit card transactions, and you don’t reconcile them either. Hint: there are multiple accounts in QuickBooks that must be reconciled to get accurate, nice books. Business accounts that should be reconciled each month and at year end are: checking and savings, lines of credit, credit cards and loans for vehicles and equipment as well as payroll. Accurate books equal accurate taxes, an opportunity for potential savings. This level of bookkeeping will provide more meaningful information for managerial budgeting and decisions too. If you are the owner and someone else is doing your books, regular reconciliation of accounts can help prevent and detect fraudulent activity and theft, and theft and embezzlement by bookkeepers happens so much more often than you think.
  5. You don’t know how to classify transactions, so you create new accounts in the Chart of Accounts each time you have new ones you don’t know. This can lead to very long, redundant financial statements. Along these same lines, you create payees using the type “Other” because it doesn’t seem like a “Vendor.”
  6. When purchasing large items such as equipment or vehicles, you classify these to expense type accounts. In fact, the purchases of these types, and over certain amounts, need to be entered properly as assets and split between the corresponding interest and loan payment liability accounts. They may need to be depreciated and may be tied into property and sales and use tax liabilities that you don’t want to miss, and the appropriate taxing authority certainly doesn’t want you to forget about either.
  7. You can’t get your bank reconciliation difference to zero, so you click reconcile anyway. This lets QuickBooks post the amount you can’t find to Reconciliation Discrepancies. This adds up over time. When I first start working with clients, the number that actually reconcile their books, notably their main checking account each month is very low, which is surprising, but shows that most users either don’t realize that QuickBooks has a reconciliation function or don't think it's important. When your tax preparer or accountant asks if your books are reconciled, this is what he or she is talking about.
  8. You enter a bill into QuickBooks when you receive it from a vendor. When you pay the vendor, instead of paying the bill through the Accounts Payable module, you use “Write Check” in the banking drop down and classify it to an expense account. The bill is showing up when you run an accounts payable report and you have entered the expense twice. Not good and this creates very messy books.
  9. You set up “Items” and choose “inventory” instead of “service” or “non-inventory” items. If you do this when you do not actually have inventory this will cause your balance sheet to be incorrect and will affect several accounts in the Chart of Accounts since inventory is complex and requires multiple steps in several accounts to work correctly. Having a really long, messy Items list is another clue that all is not well in QuickBooks.
  10. Drum roll please. You know you need help with QuickBooks if you run a Profit and Loss (also known as an income statement) and wonder why the numbers don’t look right based upon what you know about your business.