Whether you do your own books, have a bookkeeper on staff, or have an outside professional handle it for you, there is always a chance of errors. Data entry errors, missed entries, misclassification, or even a technical problem with your software can cause problems. (Case in point, QuickBooks Online has had a few such errors lately, resulting in duplicate entries that need to be excluded or deleted.)
By themselves, these little errors may not be a problem, unless you’re dealing with large amounts in the first place. For most people, the problem is that they accumulate. Mistakes snowball because they throw off totals and the mess just gets worse. Meanwhile, most people tend to avoid fixing them because it’s stressful looking at messy books and they aren’t sure what to look for, or perhaps they have no clue on how to fix it.
Mistakes Can Cost You
What’s the big deal about having messy books? Here are a few of the problems you can run into:
When it comes time to do your taxes, all those errors are going to throw off your numbers. What you have just won’t add up. This makes your tax preparers job harder. A good tax preparer will sort it out and charge you for all the extra work. A poor one will just make the numbers fit as best they can and leave the mistakes for an IRS auditor to find. Neither is a great option for you.
If you need to do a bunch of clean-up at the last minute (i.e. when you give your CPA the file a week before tax day and he or she tells you your books are a mess) it could delay you enough to make you miss the filing deadline. You can always file an extension, but that doesn’t mean you don’t still need to pay what you owe on the usual due date. Without “clean” books, you need to estimate what you owe and overpay to avoid underpayment penalties.
Guess what? The government doesn’t pay you interest on the overpayment you let them borrow while you straightened out your books (even though they would charge you interest if you underpaid). Not a great option either.
It’s easy to miss out on deductions and credits if your books aren’t in good shape. Your tax preparer may not realize that certain expenses were incurred, or that they belong in a category that would entitle you to a deduction. It’s also possible that you will take a deduction and have it disallowed, or that your accountant will pass over a deduction because you don’t have the receipts to back up the expense. With the new changes making tax time confusing it’s even more crucial to have everything in order.
There are a few times when a clean-up is the most helpful. Here are three big ones:
Tax Time at Year End
Periodically getting your books cleaned up and in order is a good idea. When you near the end of a period or a tax deadline (but not too close!) you may want to do a clean-up. This is like the annual check-up you get from the doctor or dentist. Doing this regularly can keep you from ending up in an emergency situation without having enough time to fix it.
If you’re dealing with a high-income business or have had trouble with messy books in the past, you may want to do this quarterly or even monthly.
After a Change of Staff
Whether you do your own books, having someone on staff, or have a contractor from the outside, a change of bookkeepers can be a good time to do some clean-up work. This gives your new bookkeeper a good place to start and ensures that old mistakes don’t carry over with the assumption that they are accurate.
If your new bookkeeper is knowledgeable, they can often offer clean up for a one-time fee at the beginning of their engagement. If they aren’t up to the challenge, you may want to have a clean-up expert take care of it before passing the day-to-day bookkeeping on to your new person.
Of course, there’s no time like the present to get your books in great shape! The longer you wait, the more little errors will accumulate and the deeper you’ll need to dig to correct them. Reach out to an expert today to get started on the process.
Check with your accountant or bookkeeper on help with cleaning up your books. If you’re looking for a new tech-savvy accountant, contact me for a consultation.
My name is Noel Lorenzana, and I’m available to discuss your bookkeeping and accounting questions. I’m an Illinois licensed, Registered Certified Public Accountant with over 25 years of experience. I’m dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicago area.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.