Tag: QuickBooks

Posted on by Michael Siebert

Why Bank Reconciliations are Absolutely Necessary for Your Small Business

Great Depression Bank Runs

 

Why doesn’t my QuickBooks balance match my bank balance?

Whenever you issue checks to vendors, there is no saying how long it will take the vendor to deposit the check into their bank account.  This represents a “timing difference”.  For instance, if you issue a check on March 29th, and the vendor doesn’t deposit the check until June 29th (For whatever reason) there is a significant timing difference between when this check was entered into your accounting software and when it effectively hits the bank statement.  Timing differences are the main reason why your QuickBooks balance doesn’t match your actual bank balance and they happen quite frequently.

 

Your QuickBooks balance, assuming you are on top of your data entry duties, is a more accurate picture of your bank balance alone as it takes into account the floating checks and already subtracts that cash from the bank account balance. It also accounts for deposits in transit (deposits that have not yet hit the bank statement).  Timing differences won’t exist however, if your checks and deposits clear within the final days of the month.

 

The goal of a reconciliation is not to find the discrepancy between your accounting software balance and your bank balance because of timing differences.  These are normal discrepancies.  The goal is see if this discrepancy is a result of error from the accounting system or error from the bank (Yes-sometimes the banks screw up too!)

 

Think of it as a way to verify that your cash from your company books is consistent with your bank statement records.  Since the ability to acquire and obtain cash is the beating heart to any business, small or large, the cash account, or multiple cash accounts deserve specific attention.  The phrase “Cash is King” has been merited all these years with great reason.

 

The Bank Statement Formula

Consistent with any bank statement is the formula used to determine how we get to the ending balance from the beginning balance.  The formula is stated below:

= Beginning Balance
+ Deposits and other Credits
–  Withdrawals and other Debits
–  Checks
–  Service charges
= Ending Balance

This is the formula that is being used to determine the reconciliation difference.

 

Reasons to do bank reconciliations

  1. Internal control – tracking the inflows and outflows of cash is crucial in determining if someone with check writing authority is abusing their power.
  2. Determining if there are missing transactions—the bank reconciliation helps determine that all of your cash transactions are in your accounting system.
  3. To see if companies are taking advantage of you—Sometimes humans make mistakes and might run your card twice on accident but sometimes it’s no accident.
  4. Discovering bank errors or accounting software data entry errors
  5. To give a true accurate depiction of the money in your bank account.  For example, take a property management company.  They may manage properties in Florida, California, Missouri, and Illinois.  With hundreds of checks being written and mailed, it is absolutely crucial to know what checks are still outstanding because these vendors can deposit the check at any time.  Some vendors take months to deposit checks (I’ve seen it before and I’ll see it again.)

So there you have it.  Now that you know why you should do a bank reconciliation, read my next post about how to do a bank reconciliation.

Posted on by Jan Roberg

Why Doesn’t My QuickBooks Income Match the Income on my Tax Return?

(Explaining the Schedule M1 for Dummies)

Photo by Jenny Kaczorowski at Flickr.com

 

So you’re a small business owner and you just got your business return back. You take a look at the tax return and it says your net income is $20,000 but you gave your QuickBooks profit and loss statement to your account and it said that your income was $15,000. What happened? Maybe instead it was the other way and your tax income was lower. What’s up with that?

 

Well first thing, if you have an accountant doing your taxes, she should be able to explain exactly what’s going on. (If she can’t, it’s time for a new accountant.) But the simple answer is right on your tax return. It’s called the Schedule M1. If you’ve got a corporation, it will be on page 5 of the tax return. If you’ve got a partnership, it’s on page 4, right underneath the balance sheet.

 

Schedule M1 is the part of the tax return that explains what’s different between the books that you handed your accountant and the tax return that you’re giving to the IRS. If you had less than $250,000 in revenue, you don’t need to submit an M1 to the IRS (tax programs will leave them blank), but it’s still a good idea to complete those schedules to make sure your books are straight.

 

So what are the most common discrepancies between tax and book income? That’s easy; you’ll find it in the meals and entertainment category and depreciation. If you don’t have expenses in either of these categories, most likely your tax income and book income are going to match up just fine. But if you do have meals and entertainment or depreciation, they almost always affect your tax income.

 

Let me explain the meals and entertainment first. That’s the category where the IRS only allows you to claim a 50% deduction on there. So let’s say you spent $3,000 in meals and entertainment. On your tax return, you’d only get to expense $1,500. That means there’s another $1500 expense that’s recorded on your books that’s not on your tax return.  So, in this example your tax net income is higher than your book income.

 

Depreciation usually goes the other way.  Often small businesses ignore depreciation.  Or they run depreciation through their software program, but it’s not the same depreciation schedule that’s used for taxes.  For example, using the straight line method for book purposes but using the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.  Usually that makes for a tax adjustment the other way.

 

Let’s look at an example so you can see what the Schedule M-1 looks like and how it affects your net income.  In the example below, the business owner showed $20,000 of net income on his QuickBooks profit and loss statement.  He had $2,600 of travel and entertainment expenses, so half of that get’s added to his taxable income.  He also had $4,500 of depreciation that showed up on his tax return, but he didn’t include in his QuickBooks, so that reduces his taxable income.

 

$20,000 (net income from the profit and loss statement) + $1300 (half of the meal and entertainment expense) – $4500 (the depreciation expense) = $16,800 (the net income shown on the tax return)

 

 

There are lots of other items that can affect the Schedule M1.  These two are so common that many tax programs automatically plug them in for you.  Another common item that might show up on the M-1 is when you’ve got an expense on your profit and loss statement that your accountant says, “No, you can’t count that on your tax return.”    (We don’t do that to be mean, we just don’t look that good in prison orange.)

 

Why you want the Schedule M-1.  Let’s say you file your business tax return and you get audited by the IRS.  The first thing they do is ask for your profit and loss statement and your bank records.    The examiner takes one look at your P&L and sees you have net income of $20,000—but you’re tax return says you made $16,800.  He’s licking his chops because he gets to assess you additional taxes and he hasn’t even opened your bank statement yet.  Aha!  You’ve got your M1 showing the depreciation.  Your butt is covered.

 

Now in real life, the IRS examiner would notice the depreciation eventually anyway.  But sometimes there will be items in the M-1 that aren’t so obvious.  That’s why you want this reconciliation, because by the time the IRS gets around to auditing your books, you’ll forget the little adjustments—unless they’re tracked.  M-1 keeps you neat and tidy.