At various points, I’ve found myself drawn into shows about restaurants, bars, retail shops, hotels—oh and my new favorite is the CNBC show hosted by Camping World CEO Marcus Lemonis, the Profit, where he’ll come into all sorts of crisis situations and try to help owners fix a broken venture.
But I’m getting off track here.
One of the things you often notice in a show like the ones mentioned is the importance of having a checklist that you and your team use as a roadmap to do some work-related project the right way: For example, the checklist to clean the room in a hotel.
So I thought I’d create a similar checklist for QuickBooks users. The checklist that follows can be used to find and fix most serious errors in your QuickBooks data. And that’s important, because finding and fixing those errors should mean you get better quality financial statements. Financial statements you can use to run your business better, for example. And financial statements your banker will comfortably use to make lending decisions.
Enough rambling, here’s my list:
Step 1: Reconcile the Bank Accounts
Okay, a first, easy thing but an important thing to do? Be sure that someone reconciles the bank account or bank accounts each month. This process catches errors in your bank account bookkeeping (important in and of itself since you need to know what cash you hold).
And the process means that connected errors in other places (like expense accounts and in sales revenue numbers) get fixed too.
You can delegate this work to some competent bookkeeping type on your team. But a couple of cautions: Be sure to confirm the person knows what they’re doing and that they’re doing it right. (Ask your outside CPA to check their work at least once.)
Furthermore, do look over the reconciler’s work to make sure they’re honestly handling your accounting. (Employee theft often shows up in a good thorough bank reconciliation, so this is one of the areas you want to keep an eye on…)
Need some help with this in the form of step-by-step instructions? Dummies.com has a tutorial Steve’s written on bank account reconciliation here.
Step 2: Audit Liability Account Balances
You can double-check some of your balance sheet values by comparing what your QuickBooks data says to what outside parties say. For example, you can compare what QuickBooks says you owe the bank to what the bank says.
You want to do this. If the numbers don’t match, either loan payments aren’t getting recorded or the breakdown into interest and principal isn’t getting done right.
Typically, you can fix a liability account balance using a journal entry. (You use the Company menu’s Make General Journal Entry command to do this.) And note that when you do use a journal entry to fix such a balance, you’ll also be fixing some other incorrect amount too (often the loan interest number.)
Step 3: Find Half-the-story Invoices and Bills
QuickBooks makes it pretty easy (too easy in some ways) to only enter half-the-story transactions. But let me explain.
QuickBooks makes it easy to record a customer payment… but you can do this even if you never create the invoice the customer payment pays.
Similarly, QuickBooks makes it easy to record a vendor payment… but then never count as expense the bill the check pays.
To find these awkward errors, here’s what you do; Print a cash basis balance sheet and then look for a negative value showing for either accounts receivable or accounts payable. If you do see a negative value, you’ve encountered the “half-the-story” problem.
Note: To produce a cash basis balance sheet in QuickBooks, choose the Reports, Company & Financials, Balance Sheet Standard command. Then click the Customize Report button and mark the Cash option button on the Display tab.
To fix the “half-the-story” problems, you simply enter the invoice or invoices you should have entered to “explain” any customer payments. And enter any vendor bills you should have entered to “explain” any vendor payments.
You may need to page though customer and vendor payments to find payments you didn’t entered an invoice or bill for.
You can also often locate a “half-the-story” problem by producing a balance as of a bunch of different dates to spot when the balance in accounts receivable or accounts payable goes negative. (If the negative balance appears on July 19 of some year, you can look at the customer and vendor payments recorded on July 19.)
One other thing to note: The search and locate” process is often made easier by the fact that people usually don’t “forget” that many invoices or vendor bills. It’s common that a $5,000 negative accounts receivable value stems from a single $5,000 payment or a couple of $2,500 payments never applied to an invoice. And it’s common that a $1,000 negative accounts payable value stems from a single $1,000 payment never applied to a vendor bill or from a couple of $500 payments never applied.
Step 4: Fix Weird or Wildly Off Balance Sheet Values
Okay, so here’s a bit of accounting trivia you may find useful.
In QuickBooks (and some other accounting systems), the balance sheet usually spotlights accounting errors.
For this reason, whenever you produce a balance sheet, you should look through the values it lists and verify you don’t see something crazy. Something way, way out of line.
For example, suppose your balance sheet says you have a negative cash balance of, oh, $800,000. In other words, QuickBooks says you’ve somehow overdrawn your account by eight hundred grand. That’s weird. And probably an error stemming from some ongoing bookkeeping glitch.
Or as another example: suppose your balance sheet says you have tens upon tens of thousand of dollars of undeposited funds sitting around the office. Almost certainly, that’s an error, right? And probably some accounting mix-up or bookkeeping boo-boo has occurred.
So you want to just continuously (and this will only take seconds) produce and then briefly review the balance sheet. Confirm that some value isn’t obviously weird.
If you do spot something weird, ask the bookkeeper or accountant to fix it. (This might be you of course.)
And if the bookkeeper or accountant can’t fix the error, consider bringing in an outside accountant to find and fix the error—and then help you avoid the error in the future.
I can’t be more specific about these sorts of errors here unfortunately. People end up doing all sorts of crazy stuff in their QuickBooks file. But if you know that the craziness usually shows up on the balance sheet, you will have a place to start your search for most errors.
Step 5: Spot Suspiciously Static Values
As a follow-up to the previous point, let me also say that you probably want to semi-regularly produce a balance sheet that compares current year values to the previous year’s values. (To do this you choose the Reports, Company & Financials, Balance Sheet Prev Year Comparison command.)
And then when you do this, look for any values that never change from year to year.
If you find some account like this, verify that this constant value balance actually isn’t some old or long-forgotten account that should simply be written off and so removed from the balance sheet.
Often these amounts are small in magnitude: Some old savings account with $3 supposedly—but you know the account was closed years ago. Or some liability account that’s shown an $11 balance for as long as you can remember.
But you should still try to regularly clean this stuff off your balance sheet. A quick painless write-off not only cleans up balance sheet but also means you don’t omit income or deductions that should be counted in QuickBooks.