Year-End QBO Cleanup

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Alicia Katz Pollock: Hey, everybody, welcome to this week's edition of the unofficial QuickBooks Accountants Podcast. My name is Alicia Katz Pollock and I will be your host. I'm from Royal Wiseguy, and what I do all day, every day is clean up people's books, troubleshoot QuickBooks, and teach people how to use QuickBooks. So the topic of the day is year end cleanup for tax time. [00:00:30] This is the time of year when everybody comes to me going, my reports are wrong, something's wrong with my QuickBooks, and I go in and analyze it and figure out where the data is incorrect and go go through and whomp through it and get it all dialed in so that when they turn their reports into their accountant for taxes, they are not overpaying or underpaying. So I've kind of put together a system for doing this. I've kind of learned over the 10 or 15 [00:01:00] years that I've been doing this, where the hidey holes are, and how to just glance at a report and know the data is wrong. So I created a class on this called Year End Cleanup for taxes. And it's kind of a year end class, but it's really a cleanup class where I don't just tell you what's wrong, but I actually show you how to clean it up. Now that class is two and a half, or it might even be three hours worth of all kinds of demo goodness. And it's [00:01:30] a little harder, of course, to do this in a podcast, but we I am going to be sharing my screen during this, and I'm hoping to put this up on YouTube as well so that you can walk through.

Alicia Katz Pollock: But I definitely, definitely recommend heading over to Royal Wise Comm and finding my year end class. Go ahead and click on the calendar. It happened in January. The direct link to the class will be in the show notes. But if you wanted to listen to me and follow me. Typing it [00:02:00] in you would go to it's a bit.ly link, it's ROI dot slash year end, so ROI dot slash year end, and that will take you to the course so that you can sign up for it and watch all of the demos in an organized basis, not just me kind of podcasting it out there. All right. So but let me go through and, uh, and, and walk you through the process in just a few [00:02:30] minutes. So the big thing is, why do I do this with all of my clients? And why do I provide this service at this time of year? And that's because some accountants do actually go through your books and take a look and make sure that everything's accurate, but some of them actually just trust that you, as the business owner, know your books and have been on top of this. And they trust some will just trust that the PNL and the balance sheet that you give them are accurate and they won't even do any due diligence.

Alicia Katz Pollock: They'll just take the numbers [00:03:00] you give them and plug them in. So they assume that you're responsible and they're not responsible. So if you're a business owner listening to this, figure out which kind of accountant you have. And if you are an accountant listening to this, you kind of got to realize that most business owners books are wrong. So the the thing is that you that what I see accountants do when they know the books are wrong is they just make an adjusting journal entry so that the books match the tax [00:03:30] forms. But the problem with that is that QuickBooks online works with a lot of different automations, and they look at what was done in the past and they carried those routines forward. So, for example, if a business owner has been categorizing their meals as meals and entertainment, but, you know, it's just them getting Starbucks and you're adjusting to overdraw, QuickBooks is going to continue suggesting meals and entertainment, so it really is worth actually [00:04:00] doing the hands on work in QuickBooks to make it correct so that the you won't have to go through this hoop every single year. The other thing is that the reports are only going to be accurate if they include December 31st and January 1st with your adjusting entries, if they run any reports throughout the year for different quarters or different months, they're going to get bad data. So it really is worth taking the time to do this kind of cleanup that I'm talking about. [00:04:30]

Alicia Katz Pollock: Okay. Now, the first thing that I want to do is let you know that there are some tools in QuickBooks that you can use now for accountant users, when you are looking at a client, at your client's books, if you go up to the My Menu briefcase in the upper left hand side, that those are your accounting tools. And the two that are really relevant right now is the reports options and reclassify transactions. So the reports options is amazing [00:05:00] because what you can do is actually change the report basis. So when I'm doing a cleanup and here it is 2026, I don't want to have to type in 2025, 2025, 2025 over and over and over again and run my reports and have to change the date range on the reports. So what I do is I go into my menu and then reports options, and I change my date range to last year. Then everything that I'm doing is going to continue to default to 2025. And then when I'm done, [00:05:30] I go in and I change the date back again to this year to date or whatever their preferred time frame is so that you don't forget. Make sure you make a note or put a sticky on your monitor or something because you don't want to forget to change it back. And now all your reports all come up last year forever and ever.

Alicia Katz Pollock: So definitely check out the report options and the report tools because it's a game changer. Report tools also has a big list of all of the balance sheet accounts, including the [00:06:00] reconciliation dates. And as loyal listeners know, I'm a huge advocate for not just reconciling the checking accounts and credit cards and savings accounts. I reconcile literally everything on the on the balance sheet, with the exception of fixed assets, because as a Casper practitioner or a bookkeeper, I don't have the valuation information. So I do leave my fixed asset adjustments to the accountant user, but I will [00:06:30] go in and reconcile the payroll liabilities in the sales tax liabilities and all of the loans and the lines of credit and, and look for transactions that accidentally got categorized to the wrong place. And I find a lot of those, especially with payroll taxes, I find a lot of the time they paid maybe their HT tax or their, um, some, some business taxes and they put it to a liability account instead of the expense, which means the balance sheet is always [00:07:00] off and they don't get the deductible expense for it. And far too many accountants don't actually look at it. They just assume that it's right and therefore they don't do that due diligence. So again under my menu down to reports options. And then change your report date. And then use this screen as your central hub for knowing what work you have to do on a clean up for the file.

Alicia Katz Pollock: I also want to give a shout out [00:07:30] to the books review tool that's in your that's in your QBO accountant user, and the books Review tool is a cleanup tool that you can use that looks at trouble spots and kind of gives you a step by step checklist. Personally, I use my own checklists for it, but the books review tool is there and and available for you. So now let's go into my steps to making sure the books are correct. I've [00:08:00] actually first start with AR and AP reports. So I go in and I confirm my accounts receivable and accounts payable because a lot of the time I'll come in and I'll see AR reports with giant numbers in the 91 and over column that are either uncollectible or they got paid or there's something wrong here. And so you do need to work with the business owner to write those off. Now, [00:08:30] how you do those write offs really depends on if they're cash based or accrual based. If they are cash based, there is a tool up under the same my menu for writing off invoices. So if they're cash based with no sales tax. All it will do is just discount the open invoices and therefore you will see a change in old reports where the income has gone up, but the discount has offset it. So the grand total [00:09:00] numbers stay wash and stay the same.

Alicia Katz Pollock: But if there's sales tax involved then you need to do accrual based, um steps, which is either creating a credit memo or a new invoice in the current period and then making a payment to apply the credit memo or the new invoice to the over or under payment. So in this class that I teach I actually demonstrate how to do all of that. Uh, [00:09:30] something else that comes up in when I look at AR and AP reports are $0 balances. If you see a $0 balance, it means that the invoice and the payment or the bill and the payment all are there and it washes when you look at the customer's balance, but you still see open invoices and you still see open bills on the report. And that's because the payment was not applied to the invoice or the bill. The fix for that is simply open up the payment [00:10:00] and apply it. Check off the bill or the invoice. If you're in a situation where you've got complicated bookkeeping, where you have journal entries and accounts receivable adjustments and all of that, then you have to go and manually create a payment. And then both those journal entries and and adjustments will all be there to tie off together. But I see this a lot. I see a lot of accountants make an adjusting entry against AR and AP so that the the the report [00:10:30] numbers totals look right. But all the open invoices and all the open bills are still there.

Alicia Katz Pollock: So it is really important that you clean it up accurately. The next thing that I do is I look in undeposited funds. And so that basically means going up to the plus create menu and then into bank deposit. And I look to see if there are old invoice payments and sales receipts there that are, that are old, that if they're [00:11:00] not current and currently pending waiting to be deposited, then that means that you have duplicate revenue. And another way that you can tell is by looking at your bank register. If you look at the register and you see a deposit that says sales of product income or service income, that means it was pulled in from the banking feed. If it says Undeposited funds or has a split, then it's fine. Your normal proper qbo workflows were honored, but [00:11:30] if you see a deposit straight to income, I almost guarantee you that it's duplicated. If they are using invoices and sales receipts as their workflows. If they're doing imports from e-commerce and POS systems and third party systems, then sure, that might be perfectly legit. But if the company's workflow is paying invoices and sales receipts, then it's duplicated. The actual fix is to open up the duplicated payment, find the real [00:12:00] payment at the in the top section and check it off, and then trash can. The manual entry that was written in down at the bottom that was either typed in by the business owner or created by the banking feed, so you're just replacing one with the other.

Alicia Katz Pollock: This is one reason why closing the books is really important. If you're closing monthly, you need to do this monthly, not just at the end of the year, but at a minimum, make sure it's done at the end of the year. Now, if you are, if you look at Undeposited funds [00:12:30] and there's literally hundreds of thousands of dollars, then you do need to zero it out and you're not going to do this manual method of of editing the payments and replacing them instead. What you would do is just find. Figure out exactly what income categories were duplicated. And I do it year by year. If this is going back to several years, I'll do 2020 and then 2021 and 2022. And what I do is I use a clean up corrections category. I actually make [00:13:00] a new bank account called Clean Up Corrections. And I make all of these adjustments to clean up corrections, which gathers them all in one place. And the reason why I use a bank account for this is because bank accounts can be used in any field across all of QuickBooks, whereas if I made it in other expense, I couldn't use it as a funding source. I couldn't deposit to it. So I make it a bank account. I do all of my clean up corrections [00:13:30] to that bank account, and then when I'm completely done, I will change it to either other income or other expense, depending on whether it's a gain or a loss.

Alicia Katz Pollock: Now, a lot of the time when I'm doing a cleanup, it zeros itself out, or even if it's like it looks like it's going to be hundreds of thousands of dollars, sometimes it comes down to just a few thousand dollars, because money can neither be created nor destroyed, just like matter. [00:14:00] So the the principles of physics work in the principles of bookkeeping as well, that if your information your debits were off somewhere and your credits were off somewhere. And so by the time you find all of the mistakes from all of the different places and bring them together into one place, a lot of the time they just wash and the difference does not become material. But when I am doing a cleanup, I will make separate adjustments on a year by year basis so I can see what was wrong in 2022 [00:14:30] and what was wrong in 2023 and what was wrong in 2024 and what was. And then if I'm cleaning up 2025, we're all good. So that's the way that I do these buckets when I'm making these changes. Now there is more to it. Again, I'm giving you the synopsis. I do the demos in the class. The next thing that I do is I reconcile properly, and I make sure that I'm just not. I'm not reconciling.

Alicia Katz Pollock: I'm with I'm doing air quotes right now. I'm not just [00:15:00] quote unquote reconciling. I'm really reconciling that. Business owners think that just checking off the transactions that are on the statement and getting it to zero is a reconciliation. But we know that that's not that's just the first step. That's not the whole thing. The second step to reconciliation is looking at all the rest of the transactions that are in the register and figuring out why they are there. If it's a check that didn't clear until the following month, that's completely [00:15:30] fine. You'll see it on the next reconciliation. But if there are other transactions from the past or from this month, you've got to figure out why. You know, if you wrote a check and they haven't cashed it yet, no problem. You'll leave it there. But if it's a duplicate, if it's a check that you wrote that somebody didn't cash after six months, like what's there? So you frequently might have to do some cleanup corrections as well. One of the [00:16:00] things that I do in the reconciliation window. So for me, reconciliation is actually a big part of the cleanup because there I can sort it by the dollar amount. And I can see when when a transaction has been duplicated, a lot of the time it's because of receipts that they manually imported and categorized a receipt, but then they maybe they had a typo or it also came in from the banking feed.

Alicia Katz Pollock: And in that case, I don't delete the one that was unchecked off and keep the one from the banking feed. [00:16:30] I delete the one that was in the banking feed, because the one that I made has a receipt attached to it. And then if the dollar amount was wrong or the bank account it was in is wrong. I'll fix the transaction with the receipt so that it's correct, and then rematch it in the banking feed and then do the reconciliations. The other big mistake people make is not reconciling all of the accounts. As I mentioned before, long term liabilities [00:17:00] you got to split out that interest. Lines of credit, even mortgage escrows you got to make sure that you get your hazard insurance and property tax payments accounted for as well. If the business owns the the building. And then, of course, as I mentioned, don't overlook those pass through accounts. Make sure that you reconcile your payroll and sales tax liabilities and any other clearing accounts. I want to give a shout out actually to write tools for this. This is that's the app that Hector Garcia created. I [00:17:30] use right tool. It's huge. It's a huge part of my process for this, because when I see transactions that are in the wrong accounts, I would have to edit it and then move it and change it. And that's, you know, several clicks and 30s to a minute of time per transaction. But right tool allows me to shift click the transactions and just pick things up and move them to a different account or a different register so I can do the work [00:18:00] in bulk.

Alicia Katz Pollock: So a huge shout out to Right Tool for being a great cleanup tool. In fact, if you go to right tool app and you pay for the pro version, which I couldn't live without, if you use the code royal wise, you can get $10 off every month. Okay, so going back to my cleanup process, the next thing that I do is I look to make sure that transactions are categorized correctly. You know, all the [00:18:30] big ones that business owners get wrong all the time. If the transaction is supposed to be personal, but they they use the business funding if their meals were categorized to meals, but in fact, their owner draws if they have entertainment because there is no entertainment deduction anymore, are they filling up their gas tank but their automobile is personal, then you need to set them up with mileage tracking. But [00:19:00] here's another tool that is really important for you to know is there is under that same My Tools briefcase is a reclassified tool. So when I'm looking at my client file and I go up to my menu briefcase in the upper left hand corner at the tools down at the bottom, there's a tool called reclassify. And again, for all of you who are making journal entries to correct these just bulk move dollar [00:19:30] amounts.

Alicia Katz Pollock: Again, the banking fee is never going to learn and it's always going to be wrong. So if you take the time to go into reclassify, what it does is it'll pull up all the transactions for the year. And you can click through all of the expense transactions and double check to make sure that they are in the right place. And then if they're wrong, you don't have to edit every single individual transaction. You can just check off the ones and click reclassify and move [00:20:00] them where you want them to be. So the reclassify tool is one of my favorite. I find it so satisfying to use the reclassify tool and it just floats my boat. You can also use reclassify by the way to add and change classes and locations. My wish list is that I could use it to change customers and vendor names, especially vendor names. I don't understand why we can't do it from this tool. So hey, for those of Intuit developers out there listening [00:20:30] to me, please, please just give us the ability to do payee changes and reclassify. That's really where it belongs. Okay, so hopefully, uh, three or 5 or 100 of you have now found out there is a reclassified tool to do batch categorization changes, and that you make my life much happier and much easier. All right. So, um, other things that you need to do is adjust inventory, make sure if you're not using perpetual inventory [00:21:00] and you're using periodic inventory, get that inventory count number from December 31st.

Alicia Katz Pollock: Make sure your business owner gives it to you in cost and not how much they would receive. I've had more than one business owner say that. You know, I've got, you know, $2 million in merchandise, but that's not how much they bought it for. That's how much they would sell it for. And I've had to go back and get fresh numbers again so you can go in and adjust inventory if you are doing a perpetual [00:21:30] inventory, meaning you're using Qbo inventory tools. And every time you buy and sell, it moves the money between inventory, asset and cost of goods for you, which is nice. And in that case, you do need to use the Inventory Quantity Adjustments tool in order to actually do a physical count and change to your quantities on hand, and that allows you to write it off to shrinkage or breakage or just miscounts whatever the reason is for the change. Don't [00:22:00] overlook promotional items. If somebody's taking things out of inventory to use as prizes or giveaways, then those adjustments should go to promotions, not to a cost of goods adjustment. Next becomes your depreciation and amortization. So make sure that you get those adjustments to your fixed assets for the year. I also like to reset my equity. What I'll do is I'll take a look at [00:22:30] how I do. It depends on the entity type, because it's different from a sole proprietor versus an LLC or an S Corp.

Alicia Katz Pollock: But in general, I'll look at the owner contributions and owner draws or the shareholder investments and distributions, whatever you call it. But I'll after I've finished all the rest of the cleanup, because sometimes we just have to put things to owner draws and owner distributions. But once I'm completely done, I'll look at whatever the balance was on December [00:23:00] 31st. And on January 1st, I'll make a journal entry to transfer that total to retained earnings. That way it resets the owner equity for the year, so that I can see how much they drew out or contributed on an annual basis. Now that is a gross simplification of it because sometimes it's not retained earnings. Sometimes you have to distribute it out to owner's equity. There's more to it. [00:23:30] I do teach this in the cleanup class how to actually put the right things in the right places. Also, double check to make sure that opening balance equity is zero. Opening balance equity is the account that QuickBooks uses when you're first setting up a file to hold all of the bank balances for all of your bank accounts and loans and credit cards and all of that. So when you set it up, whatever those initial balances are, start in opening balance equity. But when you're done with [00:24:00] your setup, you move that balance over to retained earnings because that's how much money you had when you started the file.

Alicia Katz Pollock: So it makes perfect sense. So therefore Obi should be zero. And I'll look during my cleanup to see if it's not zero and if it's not zero. A lot of the time it means they started a new loan or they bought some new equipment or they brought it, they created some new inventory items and they didn't do it properly. And so the balance will [00:24:30] sit in opening balance equity until I go in and put things where they really belong. So that's a really good way of looking for new things that happened during the year. Then last but not least, I go in and I analyze the reports, and the biggest things that I do is I run a PNL on a balance sheet for all dates with columns for a year, and that allows me to see their trends. It allows me to look for anomalies, like maybe [00:25:00] they were categorizing something one way and now they're categorizing it differently. So like that line item ends after a certain date and another one starts. Well, maybe you need to merge those two together or inactivate one of them all. So I use it first to look for anomalies. Use it to look for things that are miscategorized. Is the balance unusually high or unusually low? Then I know that either there's a change in procedure, or there was a change in the business, and that is [00:25:30] one of the ways that it brings it to my attention that did they hire new employees? Did they buy new equipment? Did they hire an advertising agency? You know what's different? So running the PNL and balance sheet for all dates with columns by year gives me two opportunities.

Alicia Katz Pollock: One is to look for bad data that's in the wrong place because it's statistically significantly higher or lower, or to see trends that are happening [00:26:00] in the company that I need to pay attention to. So again, that's kind of a synopsis of what I do all day in January through March is run these kinds of analyzes on my client, My client's files and people come to me for these cleanups before they see their tax provider. So if you are a tax professional and you're like, hmm, I haven't been doing these things, I need to, um, this is a great time to start. If you don't have the capacity and the bandwidth [00:26:30] and you would like me to perform this service for you, I'm perfectly happy to do it. Um, and I, as I said, I do have a class. Um, and the link will be in the show notes where you can actually see the demonstrations for how to do all of this cleanup in, in QuickBooks online. All right. So hopefully I have filled your head with some new techniques that you can implement and that will really make a difference [00:27:00] to you and your clients. This is Alicia Pollock from Royal. Com and I will see you in the next one.