A comprehensive guide for accountants and bookkeepers.
1. Balance Sheet Review Points
- Make sure that Bank Accounts are reconciled for the period you’re reviewing. If they are not, it needs to be reconciled first.
- Start your review by matching the reconciled balance as per the Reconciliation Statement with the Actual Bank Statement. If it is not matching, look for the transactions causing the discrepancies and resolve the same. If you are using QuickBooks Online, this video might help.
- Review uncleared checks and consider voiding/writing off the checks that are older than 3 months (after confirming with the client or whosoever necessary)
- Review uncleared deposits and investigate why they are uncleared yet. Deposits dated the last few days (say, 29th-31st), may have already been cleared or may get cleared in the next month, so those should be fine as uncleared. Any other deposits should be looked into. If required, void/write off after getting appropriate approval.
- Review any uncleared transactions like Transfers and ACH Payments. They should clear from the bank on the same or in a day or two. So, if it is not the case, consider voiding/writing it off after getting appropriate approval. In case there are duplicate transactions, consider deleting them too.
- Verify the balance with the client and adjust if necessary. Businesses like Retain Stores, Super Markets, Restaurants etc., deal with cash often and they may be keeping the Cash Register or maintaining it in the POS to keep track of Cash Paid-outs and Cash Deposits. In this case, request such a document/report and verify the balance with the books.
- Review that the undeposited payments are the most recent ones (i.e., dated the last few days of the month) and are expected to be deposited in the future (or may have already been deposited in the next period).
- If there are any old undeposited payments, find out why they are not yet deposited. Consider void/writing off after proper investigation and approval.
Merchant Clearing Accounts
- Review that this account balance should ideally consist of the last few days’ receipts, which should be deposited or may have already been deposited in the next period.
- Look for receipts that have not been deposited in the bank and find the reasons. Consider void/writing off after proper investigation and approval.
- Some merchants deduct fees from every payout so you get the money in the bank net of fees. Make sure to make adjustments for the same.
- In case of any loan was availed from the merchant, they would deduct the loan installment from every payout. Make sure to make adjustments for the same.
- Review the customers showing negative balance and investigate why it is negative. Some invoices might be yet to be entered or some credit memos or payments may have been wrongly entered. Fix it as the case may be. If it is negative because of advance payment, it is okay, though.
- Review the Customers showing Zero Balance. This only means that invoices and payments/credits have not been applied. Apply it.
- Review the customers showing negligible balances (say less than $ 0.50, $ 1) and consider writing it off. At times, payments may have been made with a rounded figure, and it might cause a smaller difference in the receivables.
- Review the customers showing overdue invoices for more than 90+ days. If they are not recoverable, consider writing them off after getting the necessary approval.
- Review the ‘AR Aging Detail’ report to see any unapplied payments/credits and apply the same with the open invoices.
- Verify the balance with the client and adjust if necessary.
- Look for accounts like Insurance, Rent, Subscriptions etc., and if the expenses are paid in advance, it should be posted as Prepaid. In cases where expenses are paid in advance but are small in nature (say, below the threshold limit of $ 200 or whatever you’ve decided), you may decide to expense them only instead of doing prepaid adjustments.
- Ensure to record expense recognition entries and match the ending balance as per Prepaid Schedule.
Bookkeeping Tip - If there are 3-4 kinds of expenses where we generally expect pre-payments, you may create a separate sub-account for each type of expense. However, if there might be more of such expenses, you may have one Prepaid Account but then assign the vendor name to every single transaction (Pre-Payment and Expense Recognition entries). We can then run the Prepaid Expenses GL Report and group by vendor, showing us all the transactions grouped by each vendor and the remaining balance.
- Where the Advance Payment and Repayment is managed through Payroll System, match the balance as per Payroll Report with the Balance shown in the balance sheet.
- At times, advances are paid directly out of the bank, but the repayment is made through Payroll. In this case, review that Advance Payment is not recorded as an Expense but booked as Advance only.
Bookkeeping Tip - Rather than creating a separate advance/loan account for every single employee (which eventually screws the Chart of accounts), It is a good practice to have just one account but then, assign the name to every single transaction (Advance Payment and Repayment). We can then run Employee Advance/Loan GL Report and group by the employee to know who owes how much.
- Look for any purchases below the Capitalization Limit (Say $ 2,000) and expense them out.
- Ensure to record depreciation entries, considering any new assets bought in the same period.
- Review accounts like Office Expenses, Office Supplies/Equipment, Repairs and Maintenance etc., and transactions for more than the capitalization limit should be capitalized.
- Ensure to have proper documentation/bill copy for each newly purchased asset.
- Ideally, this account's balance should remain the same every month except if any new deposit is added or returned. Review any newly added transactions to confirm that it is for Security Deposit only.
- At times, when contract is ended (say Rent agreement), security deposit may get adjusted for the last remaining payment. In this case, make proper adjustments to book the expense and return the deposit.
- Review the vendors showing a negative balance on Aging Report and investigate why it is negative. Some bills may need to be entered yet, or some credit or payments may have been wrongly entered. Fix it as the case may be. If it is negative because of advance payment, it is okay, though.
- Review the Vendors showing Zero Balance. This only means that bills and payments/credits have not been applied. Apply it.
- Review the vendors showing negligible balances (say less than $ 0.50, $ 1) and consider writing it off. At times, payments may have been made with a rounded figure and it might cause a smaller difference in the payable balance.
- Review the vendors showing overdue invoices for more than 90+ days. If they are not payable, consider writing them off after getting the necessary approval.
- Review that there are no such cash vendors like Amazon, Uber, Starbucks showing payable.
- Review the ‘AR Aging Detail’ report to see any unapplied payments/credits and apply the same with the open invoices.
- Review that there are no uncleared transactions. If there are uncleared credit card payments or charges dated the last few days near the statement date and expected to appear in the coming statement, they are just fine.
- Wherever monthly loan statements are available, the loan accounts should be reconciled just like Bank Accounts and the loan balance should match.
- In case loan statements are unavailable monthly, reconcile the balance with the Amortization Schedule.
Payroll Tax Liabilities
- Review and match the liability figure with the Tax Liability Report (Payroll Service Provider Companies should give a Tax Liability Report). This account should reflect the balance yet to be paid and will be paid off in the future whenever it is due.
- Review that the balance in this account is a real payable and is getting paid off in the next month.
- Review that all recurring expenses such as Rent, Merchant Fees, Subscription Payments, Electricity etc are accounted for. If you’re missing the bill or an expense yet to be recorded, make sure to accrue the same.
- Review that payroll accruals entries have been entered.
- Since accruals entries are generally reversed on the next day (the first of the followingz month), this account should reflect the balance coming out of the current month’s accruals only.
- Verify that there are no abnormal accounts like ‘Opening Balance Equity’.
- Verify that prior year Shareholder Distributions or Partner Draws were cleared to Retained Earnings in the current fiscal year.
- Review the new transactions recorded to Equity to ensure they are correctly recorded (generally, it is not so often that we see the introduction of capital every month).
- In the case of a corporation, review that the equity section has common stock, additional paid-in capital, and shareholder distributions account.
- In the case of sole proprietorship or partnership, review that equity section has Member's Contributions and Member's Draw account for each partner.
2. Profit & Loss Review Points
General Review Points
- In the case of Cash basis accounting, revenue/sales are directly booked from bank deposits. These bank deposits might be inclusive of sales tax/GST. If so, It needs to be separated from the total deposit amount and should be recorded as Liability.
- If revenue is recorded from any third-party invoicing/billing app (say POS), ensure to reconcile the total monthly revenue with these apps.
- Look for Transaction Type inconsistency for vendors and customers. For example, there is an invoice of Customer ABC recorded in the Services account. Along with it, there is a sales receipt/deposit too recorded. In this case, the sales receipt/deposit could be a payment towards the invoice and should have been applied to the invoice. This indicates duplication. Similarly, look for vendors having Bills vs Check/Expense transactions. It could also be duplicate transactions.
- Check if class tracking is used; if so, verify all transactions are assigned to a class.
- Reclassify any expenses coded to a parent account instead of a sub-account.
- Reclassify Uncategorized Entries (check Miscellaneous, Uncategorized, Ask my Accountant accounts) to appropriate accounts
- Look for any account showing a negative amount and take necessary action.
- The expenses like Rent, Apps Subscription, and Electricity should be consistent. Accrue it if necessary.
- Penalties, Life Insurance, should be in a separate Other Expense account.
- Review accounts like Office Expenses, Repairs, and Maintenance, Office Equipment, etc, and consider reclassifying purchases transactions more than $ 2.5k (as per the cap limit you set)
- Review accounts like Insurance, Apps Subscription, Rent, etc to ensure that it doesn’t have any expenses for the future. If so, consider reclassifying it to Prepaid Expense.
- Verify that Gross Wages match the payroll report.
- Review that Payroll Taxes should only include the employer portion and not the employee portion. It should match with Payroll Report.
- All corporations: officer wages should be split out from Gross Wages in a separate expense account.
- At times, Advances are paid through Payroll. Make sure it’s not recorded as a part of Gross Wages but as an Asset on Balance Sheet.
- Employee Benefits should be recorded separately and kept separate from Gross Wages.
- Verify Payroll Deductions (Garnishments, Investments, Taxes etc) and ensure that it’s not recorded on the P&L but should be recorded as Liability on Balance Sheet.
3. General Review Points
- Review transactions without Payee/Name and assign the appropriate name. (helpful if you want to review expenses by vendor, 1099 reporting)
- Look for Unusual Entries such as a vendor or customers who didn’t have a transaction for a long time (say for more than 15 months), and suddenly, there are transactions now. Review them to ensure that these are legitimate transactions.
- Consider merging duplicate Vendors/Customers/Accounts.
- Consider making all those vendors/customers/accounts inactive that have not been used for more than 12 months (helpful to have a clean and accurate vendor, customer and GL List)
- Review Duplicate Entries and delete them as required.
- Review any newly created vendor, customer, and account transactions to ensure that it’s coded correctly. In the case of newly created vendors, you can consider reaching out for W9 form, if not available.