Closing
How to tell if your books are really tax ready
Ten questions you can answer today, with QuickBooks open, without taking anyone's word for it.
Your books are tax ready when they pass a test you can run yourself today with QuickBooks open: every account reconciled through the last closed month with the report saved, nothing uncategorized, Undeposited Funds and Opening Balance Equity at zero, revenue tied to deposits and to what the platforms report, personal spending out, loans carrying the real balance, assets recorded, contractor W-9s on file and documents attached. Every item that fails turns into CPA hours spent doing bookkeeper work.
The test, with the system open in front of you
Most owners answer questions about their own books with a feeling: I think it is fine, my bookkeeper sends reports every month, QuickBooks is connected to the bank. None of those three statements can be verified. The ten below can. Set aside an hour, open QuickBooks on the last closed month and answer yes or no to each one.
| What to check | Where to look | What it saves your CPA from |
|---|---|---|
| Every account reconciled through the last closed month | The saved reconciliation report for every account, card and loan, with the month's date | Rebuilding the match between system and statement from scratch |
| No transactions left uncategorized | The Uncategorized Expense and Uncategorized Income balances on the P&L | Guessing the category of spending only you can explain |
| Undeposited Funds at zero or explained | The Undeposited Funds balance on the Balance Sheet | Revenue counted twice or a deposit with no source |
| Opening Balance Equity at zero | The equity section of the Balance Sheet | Chasing a balance that entered the system with no offsetting entry |
| Revenue tied to deposits and to the platforms | P&L revenue against bank deposits and the processor's annual summary | Reporting more or less revenue than the business actually took in |
| Personal spending out of the result | The expense account ledgers, looking for groceries, travel and household bills | Deducting what is not the business's and having to undo it later |
| Loans carrying the real balance | The Balance Sheet balance against the balance the lender reports | Splitting interest from principal installment by installment, for a whole year |
| Assets bought during the year recorded as assets | Fixed asset accounts on the Balance Sheet and the large purchases on the P&L | Hunting for equipment hidden among the month's expenses |
| Contractor W-9s on file | Each vendor record in QuickBooks and the total paid during the year | Building the 1099-NEC list in January, in the tightest window of the year |
| Documents attached to the relevant transactions | The attachment on the asset, loan and unusual expense transactions themselves | Trading emails with you for weeks, billing by the hour |
Connected to the bank does not mean correct
The QuickBooks bank feed pulls transactions into the system. That is all it does. It does not know whether that Home Depot purchase was job material, a tool that belongs on the balance sheet, or a faucet for the owner's house. It also does not know whether an 8,000 dollar deposit pays three invoices or is a retainer for a job that has not started.
Automatic rules make it worse when nobody reviews them. The rule learned that everything from Home Depot is material, and it repeats the same mistake all year with the same confidence. Reconciliation is something else: comparing the system to the statement until the ending balance matches, month by month, and saving the report that proves it. A feed without reconciliation is data entry, not bookkeeping.
The three accounts that give the system away
If you only have time for three lines, look at these. They almost never show up in the report that arrives by email, and they are the first place an experienced CPA looks.
- Uncategorized. Every dollar there is a decision nobody made. When the amount is large, the year's result is wrong in both directions: legitimate expense in the wrong place and deductions that go missing.
- Undeposited Funds. It is the holding account between getting paid and depositing. Amounts sitting there from months ago mean payments that never reached the bank inside the system, or a deposit entered separately, with revenue counted twice.
- Opening Balance Equity. It should only exist during the system's first days. A balance there today means someone forced an opening number or an adjustment to make something tie. Your CPA will ask, and nobody will know the answer.
Revenue: the three number test
Take revenue from the year to date P&L. Take the total deposited into the business accounts for the same period. Take the annual summary from your card processor or payment platform. The three numbers do not have to be identical, but every difference needs a name: platform fees, cash received, customer deposits, transfers between your own accounts.
A difference with no name is an error. And a revenue error is the kind your CPA cannot fix alone, because they do not know where the money came from. It is the question that stalls the return and grows their invoice.
What to do with whatever failed
If one or two items failed in the current month, it is routine work: categorize, reconcile, request the missing W-9. If the same items fail across several past months, the problem is not the month, it is the foundation. In that case the path is a cleanup, which fixes the history before any close. Closing the year on a broken foundation only stamps the error in place.
And if the doubt is about who does what here, the article on bookkeeper, accountant and tax preparer separates the three roles.
Tax ready all year versus scrambling in March
Run this test every month and March arrives with the work already done. Run it once a year and March is when you discover everything that happened last March. The difference is not in total effort. It is in when the effort happens and what it costs.
| Situation | Books ready all year | The March scramble |
|---|---|---|
| When the error shows up | At the monthly close, while it can still be fixed at the source | Eleven months later, when nobody remembers the transaction |
| Who answers the questions | A short list each month, answered while the facts are fresh | You, on the phone, in the middle of a job, with your CPA waiting |
| What your CPA does | Starts on the tax work, which is their job | Spends days organizing books before looking at tax |
| What you can decide during the year | Pricing, hiring and purchases, with last month's numbers in hand | Nothing, because the year's numbers only exist once the year is over |
That is why keeping the books ready for your CPA is a routine, not a project. The ten item test above is the same in January and in July. When it passes every month, year-end stops being an event.
Frequently asked
Questions on this topic
How long does this test take?
About an hour for a business with few accounts, and roughly double that when there are several cards and payment platforms. You do not need to fix anything right away. The point is to find out where the problem is.
My bookkeeper sends a report every month. Is that not enough?
A report shows the result, not whether the result is right. Ask for the reconciliation report of every account and the Balance Sheet. That is where Undeposited Funds, Opening Balance Equity and wrong loan balances show up.
Is a balance in Undeposited Funds always an error?
No. A check received at the end of the month and deposited early the next month sits there correctly. The problem is an old balance, from months back, that nobody can explain.
I failed almost every item. Where do I start?
With reconciliation. Until the accounts match the statements, fixing categories is like mopping with the tap running. Reconcile first, categorize second, attach documents last.
Does tax ready mean my taxes are handled?
No. It means the material is correct and complete for your CPA to work with. Calculating, choosing treatments, depreciation and filing the return remain theirs.
Keep reading
Related
Tax-ready bookkeeping
The monthly routine that keeps each of these criteria standing.
Bookkeeping cleanup
What to do when the whole history fails the test.
Year-end bookkeeping
The October to April calendar and the package your CPA receives.