Minimum Requirements for Accounting Solutions and Software


One of the highlights of my summer was going to the MLS All Star Game and getting to see FC Bayern Munich and many of the German World Cup winners. I enjoyed booing Clint Dempsey and other Seattle Sounders, witnessed “Pepgate”, and don’t forget the amazing assist by Deigo Valeri.

Much like the way FC Bayern Munich has dominated German and European football over the last few years, QuickBooks has long been the top accounting solution for small businesses. It is easy to learn, flexible, and it provides all the features needed for a complete accounting system that works for both the small business owner and their tax preparer. It is by no means a perfect small business accounting solution, as I have a lengthy list of suggestions & complaints for Intuit, but it is the best solution you are going to find for the price.

In recent years, some low-cost, online accounting solutions have emerged to challenge QuickBooks for the sole proprietorship market by offering more simplistic accounting and integration with other online services like Ebay, Etsy, and PayPal. While I am all for simplicity and keeping accounting work efficient, I am strongly against the use of some of these services, as many of them lack basic reporting features that should be part of even the most simplistic accounting system.   To help you avoid these inferior accounting solutions, below are the minimum requirements you should look for before committing to a specific solution.

Balance Sheet Report

If an accounting solution only provides a profit and loss report, you are missing out on crucial accounting information and an important tool that enables you to verify that your accounting records are accurate and complete. In fact, if a balance sheet report is not provided as a standard report, it should be an outright deal-breaker and “go-time” to find a different solution.

A balance sheet report provides the balances of your assets, liabilities and equity as of a specific date. This would include all your bank and credit card accounts, loans, fixed assets and accumulated depreciation accounts, payroll liabilities, and most importantly – your accumulated draws taken from the business. Even if you have a small sole proprietorship, you likely have a number of these accounts, as most business owners use credit cards and PayPal, but even if you only have one bank account and no debt, you still need to be able to generate a balance sheet so that you can see how much net profit you have withdrawn from the business. After all, one of the most difficult issues for a small business owner is determining how much cash needs to be left in the company and how much can be safely withdrawn.

In addition to providing you with account balances and your remaining equity in the company, the balance sheet report is also an important tool, and the document that most CPAs and tax preparers use to confirm that your accounting records are correct. If you have a quality tax preparer, they will take a balance sheet approach when doing the accounting work for your tax return, which means they will reconcile each balance sheet account to third party and other verifiable documents and reclassify any differences to profit and loss accounts. Once all the accounts on the balance sheet are reconciled and tied out, you can be confident the profit and loss is correct. Without the balance sheet, you would not know if changes were made to the prior year, if transactions were missing, or if there were duplications and other errors. Most CPAs and tax preparers require a balance sheet to prepare a tax return – even for sole proprietorships and small LLCS – so do not use a service that does not offer a balance sheet report.

Bank & Credit Card Account Reconciliation

I love technology and the fact that you can save hours of input work by importing transactions from banks right into accounting solutions. Even better, most accounting solutions remember expenses categories for vendors, so the input side of bookkeeping work is becoming easier. However, that doesn’t mean you can neglect basic accounting procedures like reconciling your bank and credit card accounts. It is still the best way to verify that the data in your accounting system matches the bank and that there are no duplications, stale checks, or other input and/or import errors, and your accounting solution should make the process a quick and painless.

Reconciling is the process of matching the individual transactions input and/or imported into the accounting system to a bank statement until the cleared balance in the accounting system matches the ending balance per the bank statement. The reconciliation report is important verification that your accounting records are complete and not missing any transactions, and most CPAs and tax preparers will want a copy when preparing your return, as the IRS’s most effective audit technique is their bank account analysis. Reconciliations also help identify old outstanding checks and duplications and errors that need to be voided. Without reconciliations, there is no guarantee that your accounting records are correct.

The overconfidence in imported data in an accounting system often leads to duplication errors and grossly misstated financial statements, which makes the reconciliation process even more important. Importing works great for straightforward expense transactions, but bank transfers and balance sheet transactions often create problems. Much care needs to be taken when you are reviewing and categorizing the imported transactions, and the accounting solution is not always correct in its categorization. Plus, always keep in mind that only cleared transactions are downloaded and imported – you still have to manually input any transactions that have not cleared the bank, as expenses are deductible when the check is written or charge is made, not when it clears the bank, so do not miss out on tax deductions by taking bookkeeping shortcuts. Take the time each month to reconcile all your bank and credit card accounts and review your outstanding transactions, and you will dramatically improve your accounting records and maximize your tax deductions.

All quality accounting solutions have a reconciliation feature where you can check off each deposit and check/charge as you match them to the bank statement. For example, QuickBooks, has a very easy to understand reconciliation feature that hides all transactions after the statement date, tracks the difference between the cleared balance and the bank statement balance, and allows you to click through to transactions if corrections need to be made. There are accounting solutions out there that do not offer such a feature in the name of “simplicity”, or they have a very limited reconciliation feature – please avoid these solutions at all cost. Reconciliation of bank and credit card accounts is a basic accounting function, and failure to reconcile your accounts each month results in accounting records that are simplistically inaccurate.

Statement of Cash Flows

Like the balance sheet, a statement of cash flows is an essential report that that is a minimum requirement for an accounting system. The report begins where the profit and loss report ends and shows you the inflows and outflows of cash unrelated to income and expenses, which often include loan payments, owner draws, equipment acquisitions, and loan proceeds. Even with a simple business, the statement of cash flows is just as important as the profit and loss report, so make sure an accounting solution offers a cash flow report before deciding on it.

Drill-Down Reporting and Transaction Attachments

The ability click on a transaction and quickly view the transaction is crucial for an accounting solution. As a decision maker reviewing financial statements, you are often looking for variances of concern, and you need to be able to quickly find the reasons for the differences without too many steps. You should also be able to go to the source transaction and related transactions quickly, and have the option to attach pdfs of receipts to the transactions. Make sure you use a sample company in an accounting solution before deciding on purchasing it, as minor issues with drill-down capability can cause major aggravation and waste time you could spend growing your business.

Reporting for All Entity Types

An accounting solution should have flexibility for future growth and not be limited to a specific business entity type like a sole proprietorship or simple LLC. Granted, a simplistic accounting solution may sound great for your small Schedule C business, but what about a few years later when you are looking to elect to be taxed as an S corporation? Are you going to wish you had just gone with QuickBooks so you do not have to deal with the hassle of a software migration? Businesses can grow quickly, and you need an accounting solution that is flexible enough to handle any changes. I spend much of my time assisting business owners with changes to their business structure – everything from adding new owners to converting to an LLC or S Corporation for tax savings purposes, and these changes are complex enough without having to worry about accounting software, so make sure you think long range before deciding on an accounting solution.

There you have it – my minimum requirements for an accounting solution. I am sure there are many more, so feel free to share. Also, if you have any bad experiences with particular solutions, please share with my readers. My parting advice (in case you missed my not so subtle hints)– steer clear of accounting solutions offered by web hosting companies. They are outright horrible.


Top 5 Bookkeeping Mistakes That Increase Tax Prep Fees

Are preventable bookkeeping mistakes resulting in large tax preparation fees for your business? Are you puzzled as to why your CPA or tax preparer has to make so many corrections to your accounting data? Below are the top five bookkeeping mistakes you need to be aware of as a small business owner, along with important tips on how to correct these mistakes.

Failure to Gross Up Wages

One of the most common adjustments that your CPA or tax preparer will likely make, aside from posting depreciation, is what we call “grossing up” the payroll. I know, it sounds a little weird, but it simply means that we adjust the total amount of wage expense on your books to match the gross wages on Form 940 and/or Form W-3. This adjustment is crucial, as a discrepancy between the W-3 and the annual business tax return could flag the attention of the IRS.

The problem is that most business owners and bookkeepers fail to post payroll correctly, which leaves a lot of work for their CPA or tax preparer at year-end. The commonly used shortcut of only posting net paychecks and payroll tax payments may save you input time, but if you spent just a few more minutes each time you input payroll, you could keep your books more accurate and reduce your tax preparation fees. Ask your CPA or tax preparer to create a standard entry for you, or have your payroll processor setup their general ledger interface service for you so that payroll data can be automatically imported into your accounting software.

Hiding Fixed Asset Purchases

As much as we enjoy a challenging puzzle, we prefer not to have to go searching for your fixed asset purchases in your profit and loss transaction detail. Some bookkeepers have become lazy about this in recent years because of bonus depreciation and high Section 179 depreciation limits, but regardless of the current depreciation rules, it is still important that fixed assets be properly recorded.

If you want to keep your tax prep fee low, post all capital expenditures over $200 – $500 (or more if you have a larger business) that will last longer than a year to a fixed asset account on your balance sheet. If you are not sure if a specific purchase qualifies, post it to the account anyway. Your CPA or tax preparer can always reclassify the cost if it is immaterial. Also, keep a file of supporting documentation, invoices, or receipts for all fixed asset purchases made during the year, as this makes tax preparation much easier.

Not Reconciling Balance Sheet Accounts

If you are simply inputting transactions and not at least reconciling the bank and credit card accounts, your accounting records cannot be relied upon for accuracy and you are leaving a lot of work for your CPA or tax preparer.

The reconciliation process catches duplicate entries, input errors, stale checks that need to be voided, and missing transactions. More importantly, the transactions are being tied out to a third party document, so your CPA or tax preparer can briefly review the reconciliation and the bank statement and reasonably accept the balance. Most accounting software packages have greatly simplified the reconciliation process, so you should not have an excuse for failing to reconcile all your bank and credit card accounts.

If you are a more experienced accountant and want to further reduce your tax prep fees, talk with your CPA or tax preparer and find out what other balance sheets should be reconciled each quarter or at year-end. For example, loan accounts can be reconciled to statements or amortization schedules, payroll liability accounts can be tied to payroll tax reports, and prepaid insurance accounts can be tied to billing statements.

Date Entry Errors in A/R and A/P at Year-End

QuickBooks and Peachtree have great report customization features that allow you to change a report from cash to accrual basis with one click; however, it will only work correctly if the transaction dates are input correctly. There is nothing worse than finding negative accounts receivable or payable balances on a cash basis balance sheet, and one of the most common culprits is a date entry error. If you date a payment before an invoice or a bill payment before the bill it is applied to, you are going to leave your CPA or tax preparer with some frustrating errors to correct.

The worst part is that A/R and A/P transactions take more work to correct in QuickBooks and Peachtree since customer or vendor names have to be used and multiple accounts cannot be adjusted in the same transaction. Even worse, reviewing the transaction history can be time consuming, and sometimes it can be a tangled mess to make sense of. Make sure you are reviewing your A/R and A/P Aging reports on a regular basis and investigating anything that does not look correct. A little extra work each month can save your CPA or tax preparer a lot of work at year-end and lower your tax prep bill.

Changing Prior Year Data

This is probably the greatest sin a bookkeeper can make, and unfortunately it happens far too often in small businesses. In fact, the first procedure we perform when starting the accounting work for a tax return is to look at retained earnings on the comparative balance sheet and make sure it matches the amount reported on the prior year tax return. If it does not match, it is outright frustrating for us, as we cleaned the books up last year and even sent the exported changes back, but somehow prior year transactions were changed, and now we have to find out what happen.

My recommendation is to password protect and close out the prior year after your tax return is completed and you have received the exported changes back from your CPA or tax preparer. At that point, the numbers are being reported to the IRS, so it is critical that the transactions not be changed. Unfortunately, in QuickBooks it is not always obvious that a transaction will affect the prior reported year, so the password protection works as a great reminder when inputting transactions during the following year. Plus, it protects against prior year changes caused by date entry errors.

Accounting for Health Insurance Premiums

At this point in the year, many of you are now familiar with the Small Business Health Care Tax Credit.  If you qualified for the credit for 2010, you likely witnessed first hand all the extra information that is required for the credit calculation.  Below is an except from our recent newsletter on the tax credit.

Health Insurance Premium Bookkeeping
Much of the tax credit calculation revolves around eligible employee hours and wages; however, once an employer is determined to be eligible for the credit, much more information is needed with regards to the employer’s health insurance premiums.  Fortunately, a few simple procedural bookkeeping changes can greatly simplify this portion of the calculation:

  • Classification of owner and family member insurance – when posting health and dental insurance premium payments, make sure premiums for owners and their family members are posted to a separate sub-account of employee benefits.  These premiums are not included in the calculation, so it is important that they be separated.
  • Premiums for seasonal workers – even though it is important to classify seasonal worker wages and hours separately from eligible employees, their premiums are actually included in the calculation, so make sure their premiums are included with those for eligible employees.
  • Record coverage information in books – in order to finish the calculation, you have to report the type of coverage (single or family) and the number of employees with each coverage type.  To simplify this final step, be sure to note this information in the “memo” field in your books when recording the premium payment.  Typically, this information is provided on the bill from the insurance company, and it is much easier to record this each month than pull all the bills at year end.

For general information on the Small Business Health Care Tax Credit, refer to our post from last year.

Sourcelink – Go Paperless in QuickBooks!

One of the big problems with QuickBooks, or any accounting system for that matter, is that you are constantly having to go back to the paper back up documents when reconciling or reviewing a transaction or balance.  Memos are great, but what if you could click right to the source document from the transaction in QuickBooks?

Well, Sourcelink 5.1 offers you just that and much more.  The program by, which also offers ASP QuickBooks hosting services, actually lets you link pdf scanned copies of the source documents to the QuickBooks transactions.  You could link purchase documents or HUD statements to fixed asset entries, receipts to debit/credit card transactions, purchase orders or vendor bills to bill transactions, and detail documents to journal entries.  Granted, this is going to take some extra time – especially if you do not already scan documents; however, the extra time and cost is well worth the benefits:

  • Internal reconciliation and research will be much more efficient.
  • IRS and ODR audits will be much easier to prepare for and the outcomes should be more favorable as one of the biggest reasons for adjustments is simply failure to provide receipts or documentation for expenses.
  • Your CPA will LOVE you as it will save a lot of time in the preparation of your tax return.
  • and best of all – it should minimize the files and stacks of paper that clutter your life!

I also recommend their ASP QuickBooks service if you have multiple locations or travel frequently.