How to Spot Bad Bookkeeping Before It Becomes a Tax Problem: S10E05

If you assume “clean books” means accurate books, it’s worth checking that assumption now, before tax deadlines or an IRS problem force the issue. Three previous bookkeepers had called the books clean, but our favorite Bookkeeping Mensch, Paul Rosenblum, is still finding major problems underneath, including missing credit card transactions, $15,000 in unexplained invoice payments, and a $25,000 shareholder loan that was being counted as taxable revenue. As he works through the mess, he shows how quickly one bad assumption can ripple through the books, especially when QuickBooks misses transactions, personal and business payments get mixed together, or a single deposit lands in the wrong category.

That same pattern shows up in a second cleanup, this time involving a business that started as a sole proprietorship before becoming a corporation in 2023. Unpaid sales tax, unfiled taxes, and business expenses running through personal accounts have turned the job into a years-long reconstruction. Together, these two projects make the larger point clear: bookkeeping is much more than reconciling accounts, and business owners need someone who understands the accounting behind QuickBooks, asks the right questions, and knows when the numbers don’t make sense. The longer those mistakes sit, the harder and more expensive they become to untangle.

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

Part 2: https://pod.link/1688000860/episode/QnV6enNwcm91dC0xOTU3MDIzNA

Transcript

Season 10 Episode #5: How to Spot Bad Bookkeeping Before It Becomes a Tax Problem: S10E05

In the last couple of episodes, I have been speaking about one huge project that I took on at the very beginning of July. The project kept getting bigger and bigger as I went deeper into it. Today, there is a short update on other stuff that I found and as of now, I am proud to say that I can see the light at the end of this long tunnel that tells me that this project is almost done. I have now fallen behind with my monthly clients, but many of them aren’t back until after Labor Day, so I have time to catch them up. I also will be talking about another project that I have ‘technically’ had on my desk for 2 years, but very little movement has happened until very recently. Now we are going full steam ahead.  I’m Paul Rosenblum.

As I said, the first project that I have been discussing recently is almost done. My goal was to be finished on August 15th (and I think I’ll need to extend that just a few days), but at this point, I have discovered a situation with two credit cards, both having one account and two cards. For some reason, the on-line banking into QuickBooks online is only capturing one of the cards (in the name of the 51% owner of the company). Those are now categorized in the database. The other transactions, on the card of the 49% owner of the company, might have to be manually input, and I am awaiting confirmation that those transactions are or are not part of the company that I am doing the bookkeeping for.  Payments directly from the personal account of the 51% owner are shown on the credit card statement. The other owner’s payments are as well, but not on the bank account of the company, which means that I’d have to enter a transaction of ‘additional capital from the 49% owner into QuickBooks..  If I end up not having to input the other transactions, what do we do in accounting?  I won’t be able to reconcile that credit card every month. Two possibilities here:  

1. Add up all the transactions that you wouldn’t have to enter and input that total amount and make it a distribution or a shareholder loan (talk to the accountant about that) or 
2. Enter all of the transactions separately and put them all in the shareholder loan account or a distribution account to be looked at later. Both of these scenarios you’d have to enter one side of the transaction into Additional Capital Equity as well.

In this case, there would be a lot of manual entries, which I rather not do unless I really have to – and I would have to if they were mixed expenses for personal and the company that I’m doing the books for. So, that’s one answer that I’m currently waiting for. 

As I was reconciling the two bank accounts in 2025, there were deposits that were connected to invoices showing as paid, that were not on the bank statements. Two possibilities here:  

1. The money went into a personal account and not the corporate account, which is unlikely or 
2. The invoices were double entries from another system and deposited as some kind of a batch.  

A Part of the answer that I have gotten so far is that the invoices that were created in QuickBooks were also created in another third-party software. But I still don’t know where the money went. They are looking into a few of these transactions which equal around $15,000.00 and being counted as sales since the invoices are showing as paid (in a cash accounting method, which they are). On the other side, there are bill payments using a third- party system that are not showing up on a bank statement. When I found all of these transactions that were nowhere to be found on bank statements, I created a ‘fake’ Bank account called “Not Found on Any Bank Statements”. This way, if we ever got the story on these, I could easily change the account to which they belong. 

And who says that a single transaction can’t change the profit and loss?   There was a $25,000.00 deposit that was on a bank statement but I didn’t know if it was a sale or not. The bank only went back 90 days in the details of the transactions, so I couldn’t look it up for myself. It ends up that it was a personal loan from one of the shareholders. It was being counted as taxable revenue. I will move it to a shareholder loan which does not affect the profit and loss.

Let me remind you that before me, they tell me that 3 bookkeepers worked on these books, and each told the client that they were clean to go to the tax preparer. NOT!! 

And this is another reason why I always ask so many questions of my clients.  Is this a regular shareholder loan that can be on the books for years before getting paid back (or maybe never getting paid back), or is this a personal loan from the shareholder that they want back in a reasonable time?  If it’s a personal loan, then it should be booked in the system not as a shareholder loan, but a personal loan with interest paid directly to the individual. I assume in this case that it’s probably a shareholder loan, but I need to hear it from the client. 

These episodes are not only for bookkeepers but also for business owners who think that bookkeeping is just reconciling the bank accounts and the credit card accounts. It’s much more than that--- to do this right, as you see (or hear).  

The second project that I really started to work on in June is something that I have had on my desk for quite a while. I wasn’t sure where to start and needed to talk to an accountant about it.  The client said that she had an accountant and she would put me in touch with him. I found out after talking to the accountant that the client never signed an agreement with them, so they did not look at themselves as being their accountant. It took a while to get the client to follow up, but once they did, and we had a game plan together, I started working. 

It ends up that the client started as a sole proprietor and then started a corporation in 2023. No taxes were filed and no sales tax was ever paid. And predictably, they got a knock on their door about sales tax. They had plenty of money in the bank, so the NYS sales tax person said that as long as it was paid within a week, then everything would be ok. So, the accountant and I started working together closely. I entered 3 years of deposits that were on the corporate bank statement. The deposits consisted of around 70 transactions per month and using the desktop version of QuickBooks, all of them were manually entered. As I was going through the sales, I noticed that many of them were even amounts like $100.00, $120.00, and so on. I called the client and asked them if they were collecting sales tax. They didn’t know that they had to since all the other businesses in their industry didn’t. So, to figure out sales tax, we had to go with the total of the deposits made, minus the debit card returns that were not sales, and reduce the sales by the percentage of sales tax that they were supposed to pay. So, along with the first project that I talked about in this episode, I was working on this every day.  As of the writing of this episode, on August 8, I have not only done all of the deposits for 2023, 2024, and 2025, but also through October of all of the expenses as well.  I thought I was almost done!  But no!

  Now I found out recently that the client used a personal bank account for some expenses in 2024 and 2025.  So, I have to sit down with the client and pick out which transactions on the personal bank account were for business. I won’t be able to reconcile the bank account monthly, but for data entry purposes, I will enter the bank account just like a regular one and enter all transactions. Then when everything is done, I might just change the name and the kind of account it is to ‘Additional Capital’ under the Equity section if there are any deposits, and debit card transactions would end up going into a distribution account as well as a company expense. I can do this with journal entries so that there will be an audit trail of exactly what I did. 

Taxes from 2021 and 2022 have not been filed, and the accountant and I haven’t touched those yet, as every account used is going to have business and personal stuff all mixed in together.  So, that’ll be another project, but the goal here is to get 2024 and 2025 filed (2023 is already filed) by September 15th.

 So, I have had pressure this summer with two big projects going on along with all of my monthly clients, which I am now somewhat behind in, but not for long. This is the first summer that I have taken no vacation (since my wife is retiring next month, we can take one then), and no days off during the week.  It’s going to end up being the busiest summer that I have had in 30 years. And both of these clients came to me because of webinars that I have done in the past and present. 

I think I’ll keep on working and doing this podcast for the foreseeable future since I’ll have more stories and clients and situations to report on.  

If you are a small business owner, this is why you can’t hire a bookkeeper blindly. In the case that I have been talking about for a couple of long episodes, 3 different bookkeepers said that the books were clean and good to go. They couldn’t have been more wrong.  Owners should take a basic accounting course or go to some business webinars to at least be able to understand reports given to you by bookkeepers. This was not a problem before Intuit came out with ‘QuickBooks Desktop’ back in 1994.  

Before then, bookkeepers were bookkeepers. Period. After the QuickBooks Blitz of the 1995, everyone calls themselves a bookkeeper, but relatively few actually are by having the training, knowledge, patience and expertise to actually do it right.  So don’t hire someone without checking them out. Schooling, other clients, even test them with simple accounting questions like ‘What kind of an account is Additional Capital?  Are donations tax deductible for a sole proprietorship on a schedule C filing?  And how would they enter a vehicle that is being financed for 24 months in the books?  I think you’d be amazed at some of the answers.  

I’m Paul Rosenblum