Fixing 6 Credit Cards and a Bookkeeping IRS Mistake: S10E03

When the accountant sent these books back as unusable, and three previous bookkeepers had all called them clean, our favorite Bookkeeping Mensch, Paul Rosenblum,  knew this cleanup would take a lot of time. Now he's deep into it and the books are starting to come together.

Picking up where Part 1 left off, Paul walks through the hands-on work of the last several weeks: two of six tangled credit cards now fully reconciled through 2025, months of "buy now, pay later" purchases separated out from cost of goods sold, and adjusting entries created to make beginning-of-year balances finally match reality.

Along the way, he uncovers a compliance issue that goes beyond typical cleanup: one business partner had been running a separate, wholly-owned LLC that was billed as a subcontractor to the company. This is something that the IRS doesn't allow when that partner also owns a stake in the business being billed. 

With the profit and loss nearly finished, Paul turns to the balance sheet: sorting out the equity split between two partners, tracking down company assets and home-office expenses that were never recorded, and weighing a tricky judgment call on categorizing meals between business partners, all against unclear new 2026 rules on meal deductions.

This is a grounded look at what it actually takes to turn a multi-year mess into books a tax preparer can trust. No shortcuts, and no AI required.

Part 1: https://pod.link/1688000860/episode/QnV6enNwcm91dC0xOTUwMjg1NQ

Transcript

Season 10 Episode 3: Cleaning Up the Books (Part 2): Credit Cards, a Compliance Surprise, and the Balance Sheet: S10E3

In season 10, episode 1, I talked about a new client who I took on with a very messy set of books. Today, I want to summarize that episode and give you an update, since it’s getting close to getting complete, except for the balance sheet, which will come next.  I’m Paul Rosenblum. 

I took on this client after I found out that three bookkeepers worked on the books and each one said that the books were clean and ready to go to an accountant for tax filing. The accountant sent the books back to the owner of the business saying that “these books are a mess”.  The client took a webinar that I was giving on QuickBooks and right after it ended, wrote me an email telling me that they needed a good bookkeeper.  That’s how I met her.  

I took her on as a client and started going through the books. This is what I found: 

1. 2022 – 2024 were incomplete, not reconciled and very messy in all accounts. 
2. 2025 again, not reconciled, no numbers on the bank accounts tied into the balance sheet at all
3. Most of the bank entries were in the form of journal entries with minimum information in the entries, including no vendors. 
4. Just two credit cards were on the chart of accounts, not labeled correctly, and only had payments entered, so they all had negative balances.  

I started working on the books for the first time on July 6th. I started with one bank account that was not entered at all since it started which was June of 2025. Once that was done, I switched to another bank account which all transactions were entered as journal entries.  I deleted every transaction and manually reentered from the bank statements. I found that half of the transactions were in the wrong expense or cost of goods account (and I knew that by printing out a report of the journal entries. The bank accounts alone to correct and manually enter transactions took a total of about 13 hours. Then I started with the credit cards. Every payment to every credit card (and I found 4 credit cards that were never entered into the system), were all attached to cost of goods sold – supplies. 

As I edited the payment transactions and started manually entering the expenses on the credit cards, most of the transactions were not cost of goods at all.  So, I’m very glad that I went through each transaction and did not take any shortcuts like the previous bookkeepers did.  As of this writing, two of the credit cards are totally done and reconciled correctly through 2025. 

I have 4 more credit cards to go. Hopefully, there will not be a lot of transactions to enter, but even if they are, they will be done. 

There were many payments to Affirm, which is a ‘short term loan’ company. And there is interest attached to those purchases through Affirm. All Affirm transactions were entered as cost of good – supplies.  They are all now sitting in ‘Ask My Accountant’. Once I get statements from the client, I will separate the purchase and the interest into the appropriate categories.  

In this business, there are two partners.  A married couple. Question: What would you do with many meals that the partners say that they talk business when they eat at restaurants?  That’s a tricky question, because even though they could be classified as business meals or staff meals, you want to keep that category under a certain percentage of your total income. In other words, if the IRS sees that you are making $100,000.00 a year total revenue and you spent $35,000.00 in the category of meals, that could be flagged to be questioned by mail or even a full audit.  So, talk to your tax preparer on that one. In 2026, since the business meal category has new rules, no one actually knows how ‘partner meals’ are going to be handled.  

So, in this case, I’ll have to see what the total dollar amount is in the meals category at the end of the bookkeeping in 2025 to point out to the tax preparer. 

Soon, I’ll be moving on to the balance sheet. Since the balance sheet in a corporation is reported to the IRS, it has to be as accurate as the profit and loss. 

If the company shows a profit (and as of right now it looks like it will in 2025), it’s too late to add payroll to last year – so I don’t know what the tax preparer will do about that – other than putting everything as distributions to the two owners. The bank accounts beginning balances for 2025 I have fixed by creating adjusting entries dated 1/1/2025, (based on all entries in previous years), so that the balance sheet and the reconciled balance of the bank accounts all match. And I have done that with two of the credit cards. I’ll repeat that process with the other four credit cards as I get to them.

 However, there are other issues such as the Equity split between the two partners, and some assets that the company owns that I don’t see any entries for at all. And I don’t see any entries for Home/Office expenses. As I start going through the balance sheet with a fine-tooth comb, I’ll probably find more things to correct, time permitting.  Right now, I’m concentrating on the P&L to make sure that it is accurate so taxes can be filed.   

So, there’s still more work to do, and because of the short deadline, I don’t think that things will be 100% perfect on the balance sheet, but they will be 90% or more there.

In 2026, I’d like to use classifications to separate the two parts of the business, so they can get better reports.  There are also several deposits showing up in QuickBooks that did not show up on any bank statements. I do not know yet if they are just incorrect entries, or if the deposits went into a personal or a joint bank account rather than the business account. So, I still have some detective work to do here.  But the bulk of the work has been done – at least I think it has, barring any other surprises. 

And it brings up an interesting point in any partnership -- the husband has an LLC that he owns 100%, and the books for the company that I am working on showed his company being a subcontractor expense. The IRS does not allow that if you are an owner in both companies. The choices are payroll in the Corp’s books for both partners or using distributions and shareholder loans for tax purposes after payroll is done in a company making profit.  

Looking into the not to distant future, I can see myself giving up many clients and concentrating on just taking on clients whose books need some TLC and careful work to get them up to par. 

If there are any beginning bookkeepers out there -- sometimes this is what you get handed to you. So, it’s important to have a discussion with a perspective client and take a good look at the books before you accept them and price accordingly as to the amount and the kind of work the project is going to be.  

In this particular project, would A.I. help? Probably not, as the transactions were entered, but in an improper format. I had to go through every single transaction one by one because so many were entered into the wrong expense or COGS account. 

The books that us bookkeepers create, especially in this case, will help the business owners make decisions moving forward based on real numbers in the real categories.  The Snapshot of the company is almost developed.  Another 2 weeks and I will be satisfied with it enough to forward a profit and loss to the client and the balance sheet to the tax preparer.  

And then on to the multiple projects! 

I’m Paul Rosenblum