The Dangers of Keeping Multiple Accounting Books for Your Business—And How to Fix It


As a CFO and accountant, I’ve created the books, cleaned up the books, and used the books to tell management about their company. To me, a company’s accounting books are sacrosanct. They contain 100% of the financial facts of the company—the truth, the whole truth, and nothing but the truth.

Until they don’t.

Lately, I’ve encountered client after client who keeps multiple sets of books. Some are not even aware that they are doing it. Here are four reasons why your company might end up with more than one set of books, and, if this sounds like your company, what you can do to fix the problem:

Reason #1: You and your tax preparer are not in sync

Any company that pays income tax runs the risk of creating a second set of books. All tax preparers—even smart, well-meaning CPAs—make changes to the books they are keeping for you that will never be reflected in the books that you use to manage the company. To me, this is a terrible practice.

Take depreciation as a simple example. Tax law has all kinds of things to say about depreciation. It’s natural that your tax preparer would want to maximize your depreciation deduction each year, and they should. But they should also report back any adjustments so your bookkeeper can make the same adjustments.

And depreciation is just one example. A good CPA may find all kinds of mistakes, adjustments, and simplifications. But unless they are reporting them back in a few simple journal entries—and unless you are capturing and copying those entries—you’ll end up with two very different sets of books.

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Too often a company’s management books and tax books drift apart—little by little, year after year—until they are so far apart that they have, literally, unreconcilable differences.

Why should you care? You need to care because banks do, and will want to see that you can “tie” your management books to your tax returns. Every time you go for a loan, they will want to know why there are differences. And the IRS will ask the same question if they ever audit your taxes.

And frankly, YOU should care. Part of running a business is optimizing the tax impact and if your management books diverge from the numbers you report for taxes, you’ll have a rough time planning accurately. Furthermore, you may end up in a situation where only your tax accountant knows the real numbers and how to calculate them … a dangerous situation for lots of reasons.

What to do about it: To fix this, you’ll need to get the adjustments from your tax preparer. Then, ask your bookkeeper to make the same adjustments using a “13-period year.” Each month is one period (that’s 12!), and the last day of the year is period 13 by itself. The last period should include all tax adjusting entries so that on December 31 your books look just like the tax return. Be careful to put ONLY the tax adjustments into December 31 so you keep your operating results in the first 12 periods.



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