1120S Out of balance

[LBR]

A client's end of year total assets do not equal the end of year liabilities and shareholders equity.
Advise as to what I should be looking for? Thanks

[DaveinTexas]

Take a look at their books

If they are using Quickbooks you may have to do some digging around, especially if they don't use the General Journal (no client does). I always look at Profit Distributions or draws, however they word it in their records. The use of Credit Cards/Loans to fund purchases of equipment or current expenses will throw a monkey wrench into things. Also, the payment to a CC or loan will almost always be mishandled if they do their own bookkeeping.

Hope that helps!

[David1980]

Obviously the balance sheet is wrong, question is where? If you've got access to their books you can look for common errors, like DaveinTexas suggests. Ideally with a starting point that makes sense and the rest determined through quickbooks there should be a way to figure out what the likely error is. If you wanted to go extreme, the way an auditor might audit a balance sheet is to point at a number and ask to see everything that makes up the number. Cash is easy - bank statements from the time in question showing the balance and similar documents. Some things are more difficult, especially if they're in manufacturing or something like that. So hypothetically you could point at every number and ask to see the backup documentation for that figure. If you've got their quickbooks I'd start there and see what all they used to determine the value for the number you're looking at. Repeat for all the numbers on the balance sheet. Something might show up.

I do know that there's a shortcut I'm starting to see in tax software to produce a balanced balance sheet. Basically, the software will dump the imbalance on one of the owner's equity accounts. Probably retained earnings on an 1120S. That would create a balance sheet that balances, but little guarantee it's actually a correct balance sheet. I've now seen this in two different software packages, maybe it's even more common than I think? If the prior accountant did this shortcut the starting amounts could be suspect as well, but at least they balance? If you're relying on any of those starting numbers to determine end of year numbers however, it could cause oddities.

Good luck.

[Lion]

Also, if you're using their unbalanced balance sheet, check to see if their beginning balances (in QB or whatever they used) match last year's tax return ending balances. We all know clients who make changes in the prior year after we prepare their tax returns.

Some things I don't even worry about on their balance sheet; I adjust annually on the tax returns. Accumulated Depreciation. Loan Balances.

That leads to checking if loan repayments were lumped into an expense instead of being separated into principal repayment and interest expense. I sometimes find Equipment that needs to go on the BS in their Office Supplies expense account. One secretary/bookkeeper puts the owners' draws in expenses. I know which clients to check for money going out or to ask if they used cash or a personal CC for a business expense. Or their kids were along on the trip, so need to separate airfare, etc.

I like to have a backup file so I can drill down in each item on the P&L and BS and scroll down for things that jump out.

[LBR]

Also, if you're using their unbalanced balance sheet, check to see if their beginning balances (in QB or whatever they used) match last year's tax return ending balances. We all know clients who make changes in the prior year after we prepare their tax returns.

Some things I don't even worry about on their balance sheet; I adjust annually on the tax returns. Accumulated Depreciation. Loan Balances.

That leads to checking if loan repayments were lumped into an expense instead of being separated into principal repayment and interest expense. I sometimes find Equipment that needs to go on the BS in their Office Supplies expense account. One secretary/bookkeeper puts the owners' draws in expenses. I know which clients to check for money going out or to ask if they used cash or a personal CC for a business expense. Or their kids were along on the trip, so need to separate airfare, etc.

I like to have a backup file so I can drill down in each item on the P&L and BS and scroll down for things that jump out.

Thank you for your reply!

[LBR]

If they are using Quickbooks you may have to do some digging around, especially if they don't use the General Journal (no client does). I always look at Profit Distributions or draws, however they word it in their records. The use of Credit Cards/Loans to fund purchases of equipment or current expenses will throw a monkey wrench into things. Also, the payment to a CC or loan will almost always be mishandled if they do their own bookkeeping.

Hope that helps!

Thank you for your reply!

[LBR]

Obviously the balance sheet is wrong, question is where? If you've got access to their books you can look for common errors, like DaveinTexas suggests. Ideally with a starting point that makes sense and the rest determined through quickbooks there should be a way to figure out what the likely error is. If you wanted to go extreme, the way an auditor might audit a balance sheet is to point at a number and ask to see everything that makes up the number. Cash is easy - bank statements from the time in question showing the balance and similar documents. Some things are more difficult, especially if they're in manufacturing or something like that. So hypothetically you could point at every number and ask to see the backup documentation for that figure. If you've got their quickbooks I'd start there and see what all they used to determine the value for the number you're looking at. Repeat for all the numbers on the balance sheet. Something might show up.

I do know that there's a shortcut I'm starting to see in tax software to produce a balanced balance sheet. Basically, the software will dump the imbalance on one of the owner's equity accounts. Probably retained earnings on an 1120S. That would create a balance sheet that balances, but little guarantee it's actually a correct balance sheet. I've now seen this in two different software packages, maybe it's even more common than I think? If the prior accountant did this shortcut the starting amounts could be suspect as well, but at least they balance? If you're relying on any of those starting numbers to determine end of year numbers however, it could cause oddities.

Good luck.

Thank you for your reply!