Many business people have a fairly good understanding as to how their business is doing financially. Most of their attention is put on what is coming in vs. what is going out, and what’s left over at the end of the day. Of course this wraps it all by simplifying it, but when it comes to your financial statements and your tax returns it demands a more in-depth understanding.
Your bookkeeper is your first professional who you need to count on to keep your financial records in good order. They will break down every payment and apply it to its proper category so the year end financial statements can be completed from these various accounts. If your bookkeeper does not know what they are doing, and doesn’t apply the transactions to the proper accounts, it can have a major detrimental effect on your tax filing.
Your accountant will take the year end statements from the bookkeeper and use these statements to prepare your tax return.
The financial statements are comprised of the trial balance, the profit and loss statement and the balance sheet.
The trial balance is the statement that your bookkeeper compiles to make sure that all the debits and credits balance each month, to ensure no mistakes have been made. These are of no concern to your accountant, whose focus will be on the profit and loss statement and the balance sheet.
It is your responsibility to check over these financial statements carefully before they go to your accountant. If your bookkeeper is familiar with your business and has been doing your books for a period of time, then they are far less apt to make a mistake. If you have taken a box full of receipts and other financial records to this individual at year end, and expect them to compile a year’s full of accounting records in a few weeks, then you better be absolutely sure that you check the end figures on the financials very carefully.
Your profit and loss statements:
This is going to show all of the income that you have brought in throughout the year. Then it is going to show all of the expenses. In your review you want to look at each figure carefully. You should have a pretty good idea if the figure seems accurate. However, if you see a stationery expense of $5,000, and you know that this is way too high then you have to address this. It can easily happen.
Let’s say your bookkeeper saw some receipts for purchase from a business store and didn’t notice that some of the items were furniture and not supplies. Furniture is accounted for differently on your financial statements and is classed as an asset where you can apply a depreciation expense against but not the total expense of it all at once. This is just one of many types of mistakes that can be made.
Another common mistake is to withdraw money to make a cash purchase for the business, but you don’t make note of on the check stub, or bank statements. It can end up looking like you withdrew the cash for personal use.
The balance sheet:
The profit and loss statement is easy to understand in comparison to the balance sheet. You really need to be sure that the figures for your assets and liabilities are accurate. If not the statement is giving a false presentation of your net worth.
All of the potential issues have got to be worked out before these statements go to your accountant. If you are having difficulty with them, as financial records can be really complex then you can discuss your concerns with the quality accountant that you have chosen to prepare your tax return for you.
