How do I know if my books need a cleanup?

You do not need to be an accountant to work out whether your books are trustworthy. There are a handful of checks that require no accounting knowledge at all, and most of them take a few minutes. If the books pass, you can stop worrying about it. If they do not, you will at least know what to ask for, which is a much better position than a general unease you cannot articulate.

The reason this is worth checking deliberately is that bad books rarely announce themselves. They do not produce error messages. They produce reports that look entirely normal, in the right format, with plausible numbers, right up until the moment somebody outside the business examines them. Owners usually discover the problem at the worst possible time: during a loan application, a sale, a divorce, or a notice from an agency.

What follows is the standard we apply, written so that you can apply it yourself. That is deliberate. A business owner who knows what reconciled books look like is a harder person to give bad work to, including by us. It also makes for a much shorter conversation, because you arrive knowing what you are asking for.

One thing worth saying before the list: finding problems here is common and is not a verdict on you or on whoever keeps your books. Bookkeeping drifts. It drifts fastest during growth, after a software change, after a staffing change, and during any period when the business was busier than usual. Every item below is fixable.

Estimated reading time: 11 minutes

Overview

Trustworthy books can be checked without accounting knowledge: every account reconciles to its statement through a recent date, the balance sheet contains nothing unexplained, the books agree with the last filed return in a way somebody can walk you through, and personal spending is separated from business spending. Failing several of these usually means a cleanup rather than a correction.

What this guide covers

• What clean books actually means
• The signals that something is wrong
• What to do with what you found

What clean books actually means

Clean does not mean tidy, and this is where most owners are misled. A set of books can be beautifully organized, consistently categorized, and presented in an attractive report, and still be wrong. Presentation is about how the information looks. Accuracy is about whether it corresponds to what actually happened, and only one of those can be verified.

The core of accuracy is reconciliation. Reconciling an account means proving the accounting file against a statement issued by the bank, and confirming that every transaction, in both directions, is accounted for. Until that has happened, the numbers in your reports are a record of what somebody entered, which may or may not be a record of what occurred. This is the single most important distinction in bookkeeping and the one most often glossed over.

Modern software has made this harder to see rather than easier. Bank feeds import transactions automatically, so a file can look busy and current, with a recent transaction list and up-to-date reports, while no account has been reconciled since last spring. The feed shows activity. It does not confirm completeness, it does not catch a transaction that never imported, and it does not notice a duplicate. Reconciliation does all three.

The second element is that the balance sheet has to be true. Owners tend to focus on the profit and loss statement because it answers the question they care about, which is whether the business made money. Accountants look at the balance sheet first, because it is the checkable one. A profit and loss statement is a summary of a period, and a wrong one still looks reasonable. A balance sheet claims that specific things exist right now, and each claim can be tested against something external: a bank statement, a loan statement, an invoice, a fixed asset.

The third element is consistency over time. Books that use one categorization this year and a different one last year cannot be compared, and comparison is most of what financial statements are for. If your reports cannot tell you reliably whether a cost category is rising, they are not doing the job, however accurate any single month may be.

• Tidy and accurate are different properties, and only one can be verified
• Reconciliation proves the file against a statement issued by someone else
• A bank feed shows activity, and does not confirm completeness
• The balance sheet is the checkable statement, which is why it is checked first
• Inconsistent categorization across years removes the ability to compare

The signals that something is wrong

The clearest single signal is a reconciliation that stopped. Open the accounting file, look at the most recent completed reconciliation for each account, and note the date. If that date is months behind while transactions have continued importing, you have found the problem without needing to understand anything else. Everything after that date is unverified.

The second signal lives in the balance sheet accounts nobody looks at. Software creates a holding account when it cannot determine where something belongs, named differently across products but always serving the same purpose. A balance sitting in one of those is a pile of decisions that were deferred. A small one that clears each month is normal. One that has grown steadily for two years is a list of transactions nobody could categorize, and it is usually where the real problems are.

The third is a gap between the books and the tax return that nobody can explain. Some difference is entirely normal, since a return is often prepared on a different basis than the management books and legitimate differences are reconciled on the return itself. Depreciation treated one way for tax and another for the books is the usual example, along with expense categories the tax rules limit. The failure is not the difference. It is that nobody can walk you from one to the other, which usually means the year-end adjustments your CPA made never went back into the accounting file. When that happens, every subsequent year starts from a position that does not match what was filed.

The fourth is the behavior of the person keeping your books, which is a more reliable indicator than most owners realize. Someone who reconciles is happy to show you the reconciliation. Someone who does not will reassure you instead. The distinction between being told the numbers are fine and being shown why they are fine is worth paying attention to, and asking for the evidence is a reasonable request that a competent bookkeeper will welcome.

The fifth is your own instinct about whether the reports resemble your business. Owners know things their books do not: that a particular month was quiet, that a customer paid late, that a large purchase happened in March. When the statements consistently disagree with what you know to be true, and the explanation is that the books are complicated, that is a signal rather than an answer. Our guide on bookkeeping cleanup covers what happens once problems like these are confirmed.

• Check the date of the last completed reconciliation on every account
• A growing balance in a holding account is deferred decisions, not a mystery
• An unexplained books-to-return gap usually means unposted year-end adjustments
• Being reassured rather than shown the reconciliation is itself a signal
• Reports that consistently contradict what you know deserve an explanation

What to do with what you found

If everything passed, you are in better shape than most businesses and the useful action is to keep it that way: a monthly close on a fixed schedule, reconciliations completed before reports are issued, and year-end adjustments posted back into the file each year rather than living only in the tax return.

If one or two items failed, that is usually a correction rather than a cleanup. A single account behind on reconciliation, or a holding account with a few items in it, is ordinary maintenance. Raise it with whoever keeps your books, ask for a date by which it will be current, and check that it happened.

If several failed, particularly if reconciliations stopped months ago and the balance sheet has balances nobody can explain, the honest description is a cleanup rather than a fix. The distinction matters because the work is different. A correction adjusts what exists. A cleanup establishes what is actually true and rebuilds forward from there, which means starting at the last point the records can be proved and working forward in order.

It is worth being clear about the boundary here, because these checks touch on things that are not bookkeeping. Whether a prior return should be amended, how a specific item should be treated for tax, and what any of this means for what you owe are questions for a CPA, enrolled agent, or tax attorney. AliCat Solutions does bookkeeping. We do not prepare returns or represent clients before the IRS, and where these checks surface a tax question, the honest answer is to name it as one.

The last point is about who this list is really for. It is written so that a business owner can apply it, but it is equally useful to a CPA who has inherited a client’s file and needs to explain, without an uncomfortable conversation, why the bookkeeping has to be addressed before the return can be prepared properly. Our guide on what a bookkeeper does compared with a CPA sets out how those roles divide.

• Everything passing means the job is maintaining the routine
• One or two failures is usually maintenance, with a date attached
• Several failures, especially stalled reconciliations, means a cleanup
• A correction adjusts what exists; a cleanup establishes what is true
• Tax treatment questions raised by these checks belong with a CPA

Frequently asked questions

Q: How do I check whether my accounts are actually reconciled?

A: In most accounting software there is a reconciliation report or history showing each completed reconciliation and the statement date it was performed against. Look for the most recent completed one for every account, including credit cards and loans rather than just the main checking account. What you are looking for is a date, and whether that date is close to the most recent closed month. A long list of imported transactions is not evidence of reconciliation, because bank feeds import whether or not anyone reviews them.

Q: My bookkeeper says everything is fine. How do I know?

A: Ask to be shown rather than told, and ask for something specific: the reconciliation reports for each account through the most recent closed month, and an explanation of any balance sheet account you do not recognize. This is a normal request and a competent bookkeeper will produce it without difficulty, because the reports already exist as a by-product of the work. Reluctance, delay, or an explanation of why the reports would not be meaningful is itself the answer to your question.

Q: Does an accountant preparing my tax return mean my books are fine?

A: Not necessarily, and this is a common and understandable assumption. A tax preparer works from what you provide and generally makes adjustments at year-end to arrive at figures for the return. That process produces a correct return without requiring your day-to-day books to be reconciled, and those year-end adjustments frequently never get posted back into the accounting file. The result is a business with properly filed returns and management books that disagree with them, which nobody notices until a lender, buyer, or examiner asks.

Q: How often should this be checked?

A: The full list is worth running once a year and any time something changes: a new bookkeeper, new accounting software, a merger of accounts, a period of unusual growth, or a stretch where the business was too busy to pay attention. The single most useful habit is much smaller than the full list. Each month, when you receive your statements, look at the date every account is reconciled through. That one check, done consistently, catches most of what goes wrong before it compounds.

Want to learn more?

AliCat Solutions produces reconciled, CPA-supervised monthly books for service businesses across Cedar Park, Round Rock, Leander, Georgetown, and the greater Austin area, and nationwide through our virtual bookkeeping service. If several of these checks failed, the useful next step is an assessment rather than a guess.

Citations

• What kind of records should I keep (Internal Revenue Service). The IRS description of the supporting documents a business should retain, which is the material every one of these checks ultimately relies on. https://www.irs.gov/businesses/small-businesses-self-employed/what-kind-of-records-should-i-keep
• Burden of Proof (Internal Revenue Service). The federal standard that responsibility for substantiating entries, deductions, and statements made on a return rests with the taxpayer, which is why unverifiable books are a business risk rather than a tidiness problem. https://www.irs.gov/businesses/small-businesses-self-employed/burden-of-proof
• Recordkeeping (Internal Revenue Service). The IRS guidance on keeping records as long as they are needed to prove the income or deductions on a return. https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping

Related reading

• Bookkeeping cleanup and catch-up services
• What does a bookkeeper do, and what does a CPA do?
• Why does my bookkeeper take so long to send reports?
• How to safely switch bookkeepers mid-year