No Books, No Balance Sheet?

As if you did not need a reminder – this is why you MUST always complete a balance sheet for tax returns, even when NOT required.

A returning client of mine has a small corporation.  The client does NOT keep a set of books, but rather sends us the “income” and list of expenses.  Over the years, the client has learned that I will ask about loans to the corporation, repayments of loans, and the year end balances for sales tax payable and the bank account.  All of this is sent to us.  In fact, the shareholder shows the income and expenses in a format similar to an income statement, arriving as a “profit”.

The income and assets, based on last year’s return, suggest that a balance sheet is not required. I always prepare a balance sheet. 

After making journal entries into QuickBooks, I could see that the ending cash differed from the opening cash by about $20,000.  Sounds like a loan the shareholder forgot about.  Nope, not that.

I proceeded to spend more time with back and forth emails on this issue then I did in preparing a draft tax return or the accounting.  In the end:

  1. The shareholder added the income wrong.  I needed to add $ 12,000 in sales
  2. The shareholder missed some rent, paid from personal funds (“That’s a loan?”), $4,000
  3. Several thousand dollars of other expenses, paid with a personal credit card, were included in the accounting but no mention of the credit card was included.  (Again, “that’s a loan?”).

Had I not attempted a cash reconciliation, and simply filed the return, none of these issues would have come up.

At an examination, the increase in profit would have caused the shareholder to be subject to the accuracy related penalty of 20%.


MORAL:   ALWAYS prepare the balance sheet, and make sure cash ties-in.

BEST PRACTICE:  Clients need a set of books.   Tell them that.  Take them on as a bookkeeping client if needed.  Your practice is not a Burger King – the clients don’t get to have it their way.