News & Tech Tips

Tips for QuickBooks users: 5 mistakes to avoid during bank reconciliation

Reconciling bank accounts is critical to ensuring the accuracy of your company’s accounting records. The primary purpose of a bank reconciliation is to confirm that the transactions recorded in your bank statement match those shown in your accounting records.

Generally, bank accounts should be reconciled at least monthly. However, conducting weekly or daily reconciliations for accounts with a high volume of transactions can help uncover accounting errors and fraud quickly. Here’s a list of five common mistakes to avoid when reconciling bank accounts in QuickBooks® software:

  1. Reconciling infrequently. When too much time elapses between reconciliations, it can complicate the process. Stale, undetected errors can create significant weaknesses in your financial records. It may also be harder to investigate discrepancies as memories fade regarding the specifics of unreconciled transactions.
  2. Not reviewing every transaction. It can be tempting to skip smaller transactions to expedite the reconciliation process. Reconciling every transaction, however small, ensures the accuracy and integrity of your accounting records.
  3. Relying exclusively on bank records. While QuickBooks allows users to import bank transactions, assuming every transaction is legitimate and accurate can be a mistake. For example, check payments issued to suppliers should match their invoices. Reconciling payments to source documents and bank records can uncover errors by financial institutions that processed the payments or alterations of the checks by the recipients, for higher amounts.
  4. Routinely creating accounting entries to adjust for differences. Differences may arise despite your best efforts to reconcile transactions in QuickBooks with those shown on your bank statement. The software can create an entry to adjust for the difference. Use caution, as adjusting unreconciled balances can mask errors and fraud.
  5. Not accounting for outstanding checks and deposits. Failure to keep track of checks and deposits that haven’t cleared or been posted to your account can complicate the reconciliation process. To avoid unreconciled items and the need to adjust for differences, gather unpaid and uncleared transactions before beginning a reconciliation and refer to them during the process.

Reconciling bank and credit card accounts can be time-consuming and tedious, especially if an account includes many transactions or your business operates many accounts. However, allowing accounts to be unreconciled can cause errors to multiply, impacting the accuracy of your financial records. Contact us for guidance on how to reconcile your accounts and how QuickBooks can help make the process more efficient.

Using QuickBooks to prepare 2024 budgets and forecasts

As year-end nears, many businesses and nonprofits are planning for 2024. QuickBooks® provides budget and forecast features to help management make financial predictions, as well as assess “what if” scenarios to help make more-informed business decisions. Here’s how you can use these tools for your year-end financial planning.

Budgets vs. forecasts

The budget function in QuickBooks is typically used to manage expenditures during the year to ensure that departments and locations spend according to authorized levels. QuickBooks allows you to create a new budget from scratch. However, budgeted amounts often are based on the prior year with adjustments for new projects and expected growth.

For example, your marketing department’s salaries might be based on the prior year with adjustments for raises (if any). Suppose the department hired a new team member in October 2023. When preparing the department’s 2024 budget, you’d make an adjustment for that individual’s full-year salary based on the prorated amount from the prior year.

The forecast function is used to make projections and perform “what if” analysis. To illustrate, you might run worst, most-likely and best-case scenarios for revenue and expenses for the coming year.

For example, suppose your company plans to build a new facility in the third quarter of 2024, and you plan to finance a significant portion of the cost. Because it’s unclear whether the Federal Reserve Bank will raise or lower interest rates in the coming months, you might run multiple financing scenarios with varying interest rates. You also might vary other inputs, such as expected construction costs and revenue and expenses related to opening the new facility, when you perform your scenario analysis.

How QuickBooks features work

To access these tools in QuickBooks, select “planning & budgeting” from the company menu. A budget or forecast can be created for both the profit and loss statement (also known as the income statement) and the balance sheet. You can increase the detail of a budget or forecast by adding figures at the customer/job or class level (or both).

Each budget and forecast created is saved in a unique file and managed separately. If your organization has multiple departments or locations, you can budget and forecast using QuickBooks classes. If you track job costs, you can even prepare forecasts and budgets for individual jobs.

QuickBooks also allows you to view different sets of reports for budgets and forecasts. You can use these reports to review your entries. In addition, you can view comparisons of how the company’s budget or forecast compares to actual results for income and expenses, classes, jobs or balance sheet account balances.

There are two advanced options to consider when using QuickBooks. One is the cash flow projector; this tool also allows you to determine sources and uses of cash to plan ways to avert projected shortfalls in cash. The second is the business plan tool, which allows you to develop a complete master plan for your business.

Planning in uncertain times

Many businesses are currently facing rising costs, uncertain demand, and labor shortages. In today’s volatile marketplace, preparing reports that plan for the financial future is critical to survival. It’s also important to monitor progress throughout the year — not just at year-end. The hard part is creating the underlying assumptions that will drive your budget or forecast. The easy part is entering the information into QuickBooks. Contact us to help you plan for 2024 and beyond.


Other uses for QuickBooks.

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Accounting for M&As

Business merger and acquisition (M&A) transactions have significant financial reporting implications. Notably, the company’s balance sheet will look markedly different than it did before the business combination. Here’s some guidance on reporting business combinations under U.S. Generally Accepted Accounting Principles (GAAP).

Allocating the purchase price

GAAP requires a buyer to allocate the purchase price to all acquired assets and liabilities based on their fair values. This process starts by estimating a cash equivalent purchase price.

If a buyer pays 100% cash up front, the purchase price is already at a cash equivalent value. But the cash equivalent price is less clear if a seller accepts noncash terms, such as an earnout that’s contingent on the acquired entity’s future performance or stock in the newly formed entity.

The next step is to identify all tangible and intangible assets and liabilities acquired in the business combination. The seller’s presale balance sheet will report most tangible assets and liabilities, including inventory, equipment, and payables. However, intangibles are reported only if they were previously purchased by the seller. Most intangibles are generated in-house, so they’re rarely included on the seller’s balance sheet.

Assigning fair value

Acquired assets and liabilities are then added to the buyer’s balance sheet, based on their fair values on the acquisition date. The difference between the sum of these fair values and the purchase price is reported as goodwill.

Goodwill and other indefinite-lived intangibles — such as brand names and in-process research and development — usually aren’t amortized for GAAP purposes. Instead, companies generally must test goodwill for impairment each year. Impairment testing also may be necessary when certain triggering events happen.

Examples of triggering events include the loss of a major customer or enactment of unfavorable government regulations. If a borrower reports an impairment loss, it could mean that the business combination has failed to achieve management’s expectations.

Rather than test for impairment, private companies may elect to amortize goodwill straight-line, generally over 10 years. However, companies that elect this alternate method must still test for impairment when certain triggering events occur.

In rare instances, a buyer negotiates a bargain purchase. Here, the fair value of the net assets exceeds the fair value of consideration transfer (the purchase price). Rather than book negative goodwill, the buyer reports a gain from the purchase on the income statement.

Get it right

Accurate purchase price allocations are essential to minimizing write-offs and restatements in subsequent periods. Contact us to get M&A accounting right from the start. We can help ensure your fair value estimates are supported by market data and reliable valuation techniques.

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Tips for a faster month-end close

Does your company struggle to close its books at the end of each month? The month-end close requires accounting personnel to round up data from across the organization. This process can strain internal resources, potentially leading to delayed financial reporting, errors and even fraud. Here are some simple ways to streamline your company’s monthly closing process.

Develop a standardized process

Gathering accounting data involves many moving parts throughout the organization. To reduce the stress, aim for a consistent approach that applies standard operating procedures and robust checklists.

This minimizes the use of ad-hoc processes. It also helps ensure consistency when reporting financial data month after month.

Provide ample time for data analysis

Too often, the accounting department dedicates most of the time allocated to closing the books to the mechanics of the process. But spending some time analyzing the data for integrity and accuracy is critical. Examples of review procedures include:

  • Reconciling amounts in a ledger to source documents (such as invoices, contracts, or bank records),
  • Testing a random sample of transactions for accuracy,
  • Benchmarking monthly results against historical performance or industry standards, and
  • Assigning multiple workers to perform the same tasks simultaneously.

Without adequate due diligence, the probability of errors (or fraud) in the financial statements increases. Failure to evaluate the data can result in more time being spent correcting errors that could have been caught with a simple review — before they were recorded in your financial records.

Encourage process improvements

Workers who are actively involved in closing out the books often may be best equipped to recognize trouble spots and bottlenecks. So, it’s important to adopt a continuous improvement mindset.

Consider brainstorming as a team. Then, assign responsibility for adopting changes to an employee with the follow-through capabilities and authority to drive change in your organization.

Be flexible with staffing

Often, accounting departments require certain specialized staff to be present during the month-end close. If an employee is unavailable, the department may be shorthanded and unable to complete critical tasks.

Implementing a cross-training program for key steps can help minimize frustration and delays. It may also help identify inefficiencies in the financial reporting process.

Consider automation

Your accounting department may rely on manual processes to extract, manipulate, and report data. However, these processes create opportunities for human errors and fraud.

Fortunately, modern accounting software can automate certain routine, repeatable tasks, such as invoicing, accounts payable management, and payroll administration. In some cases, you may need to upgrade your current accounting software to take full advantage of the power of automation.

Keep it simple

Closing the books doesn’t have to be a stressful, labor-intensive chore. We can help you simplify the process and give your accounting staff more time to focus on value-added tasks that take your company’s financial reporting to the next level.

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Shareholder advances: Debt or equity?

From time to time, owners of closely held businesses might need to advance their companies money to bridge a temporary downturn or provide funds for an expansion or another major purchase. How should those advances be classified under U.S. Generally Accepted Accounting Principles (GAAP)? Depending on the facts and circumstances of the transaction, an advance may be reported as debt or additional paid-in capital.

What are the deciding factors?

When classifying a shareholder advance, it’s important to consider the economic substance of the transaction over its form. The accounting rules lay out the following issues to evaluate when reporting these transactions:

Intent to repay. Open-ended understandings between related parties about repayment imply that an advance is a form of equity. For example, an advance may be classified as a capital contribution if it was extended to save the business from imminent failure and no attempts at repayment have ever been made.

Terms of the advance. An advance is more likely to be treated as bona fide debt if the parties have signed a written promissory note that bears reasonable interest, has a fixed maturity date and a history of periodic loan repayments, and includes some form of collateral. However, if an advance is subordinate to bank debt and other creditors, it’s more likely to qualify as equity.

Ability to repay. This includes the company’s historic and future debt service capacity, as well as its credit standing and ability to secure other forms of financing. The stronger these factors are, the more appropriate it may be to classify the advance as debt.

Third-party reporting. Consistently treating an advance as debt (or equity) on tax returns can provide additional insight into its proper classification.

With shareholder advances, disclosures are key. Under GAAP, you’re required to describe any related-party transactions, including the magnitude and specific line items in the financial statements that are affected. Numerous related-party transactions may necessitate the use of a tabular format to make the footnotes to the financial statements more reader-friendly.

Why does it matter?

The proper classification of shareholder advances is especially important when a company has unsecured bank loans or more than one shareholder. It’s also relevant for tax purposes because advances that are classified as debt typically require imputed interest charges. However, the tax rules don’t always align with GAAP.

To further complicate matters, shareholders sometimes forgive loans or convert them to equity. Reporting these types of transactions can become complex when the fair value of the equity differs from the carrying value of the debt.

Get it right

There isn’t a one-size-fits-all solution for classifying shareholder advances. We can help you address the challenges of reporting these transactions and adequately disclose the details in your financial statements.

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