The Desktop Accountant, March 1998

QuickBooks at Tax Time
March, 1998

Getting Ready to File your Return

If you have faithfully recorded all of your information in QuickBooks throughout the year, you can now reap the benefits of your labors. All the reports you need for tax time are available to you by simply printing them out and giving them to your accountant. However, there are just a few simple things you must do at the end of each year to ensure your records are accurate, and to archive your information. In my seminars, I teach the specifics of how to complete each of these steps. Make sure you complete each one of them before relying on your reports for the tax return.

Reconcile all balance sheet accounts including bank accounts, credit card accounts, loans receivable, loans payable. Print bank reconciliation reports for each bank account.

Print and verify A/R and A/P reports (Open Invoices and Unpaid Bills Detail). Look for unapplied payments or credits and if necessary, apply them.

If needed, enter adjusting journal entries for depreciation, amortization, prepaid expenses, and unearned income.

For partnerships, enter adjusting journal entries to distribute net income to each of the partner’s capital accounts.

For sole proprietorships, enter adjusting journal entries to close all Owner’s Drawing and Owner’s Investments into Owner’s Equity.

Create and verify the following reports: Profit & Loss, Balance Sheet, Fixed Assets Purchase Detail for the year.

If you use TurboTax*, verify that:

Each account in your chart of accounts is associated with the correct line on the tax return

Create and verify an Income Tax Summary or Income Tax Detail report

Launch TurboTax and import your QuickBooks data directly into TurboTax

Understanding QuickBooks Cash Basis Reports

One of the best features of QuickBooks is that it does not lock you into either cash or accrual basis accounting. What this means is you can use accrual basis reports throughout the year for management information, and then choose to use cash basis reports for preparing your taxes. QuickBooks doesn't really keep two sets of books, it just knows how to remove unreceived income and unpaid expenses, allowing you to print the cash basis reports you need. On the cash basis P&L report, QuickBooks omits from income the total of all open invoices that use Items associated with income accounts. (Under many circumstances this is simply the total of all open invoices).

Similarly, on a cash basis Balance Sheet, QuickBooks reduces Accounts Receivable by the total of all Open Invoices that use Items associated with income accounts.

The same things happens with unpaid bills with the only difference being that expenses and Accounts Payable are reduced on cash basis reports. However, if you find a balance in A/R or A/P on a cash balance sheet, don't panic! Its probably due to one of the following situations. Here is what I teach in my seminars:

One or more of the outstanding invoices includes sales tax. In this case, the sales tax portion of the invoice is left in A/R as well as in Sales Tax Payable. This assumes you've set the Sales Tax Preferences for owing sales tax "as of Invoice date".

One or more of the outstanding invoices includes an Inventory Part. In this case, the portion of the invoice that involves inventory is left in A/R as well as the Inventory Asset.

One or more of the invoices includes an Item that points to a balance sheet account. In most cases this is because the invoice is connected to a balance sheet account and both A/R and the offsetting balance sheet account are left unchanged by the cash basis report.

One or more of the unpaid bills includes an Item (or account) that points to a balance sheet account. An example of this situation is a credit card bill. Again, in this case since the bill is connected to a balance sheet account, both A/P and the offsetting balance sheet account (Credit Card payable) are left unchanged.

If A/R has a negative balance, it is probably due to invoices not being connected with payments or credit memos. Run an Open Invoices report and look for negative numbers. If you find both positive and negative numbers on this report, use the Receive Payments screen to connect the credits (or payments) to your open invoices.

If A/P has a negative balance, it is probably because a bill payment or a bill credit has not been applied to a bill. To fix this, use the Pay Bills screen. The unapplied bill credits or payments will show as negative numbers. To apply a credit to a bill, click on a negative number and a positive number for the same Vendor and click OK or Next.

Prepaid Income and Expenses on a Cash Basis Balance Sheet

Although QuickBooks does a great job of removing invoices and bills when you create a cash basis report, it does not reverse any accruals you make for prepaid expenses or unearned income. In order to create a true cash basis balance sheet, you may need to enter journal entries to reverse accruals for prepaids

Backing up and Archiving your Data

Why back up your data? Because if you don't, the sky will fall and the earth will cease to exist. Does that scare you enough? Maybe its better to consider the positive side of backing up. Although it won't happen very often, when the day comes that you need to recover from a hard disk crash, you'll be so happy that you can recover all your data by simply restoring from your backup. Use whatever reasoning you can to convince yourself that backing up your data is just as important as invoicing your customers or paying your bills.

I recommend creating three backup sets. One for Monday, Wednesday, Friday, one for Tuesday, Thursday and Saturday, and a third set for the end of each month. You should use either floppy diskettes, or if your data file is large, consider investing in a zip drive which stores 100 MB on each disk. QuickBooks for Windows uses filename extensions to differentiate between data files and backup files. Data files use the .QBW extension and backup files use the .QBB extension.

When you use the Backup command, QuickBooks creates a compressed copy of your data on your backup disk. Also, if your data file is too large to fit on one disk, QuickBooks will split the backup file onto multiple diskettes. The backup filename ends with a .QBB extension.

If you ever need to use the backup data again, use the Restore command in QuickBooks. This command converts a backup file (.QBB) into a QuickBooks data file (.QBW). You cannot directly open a .QBB file in QuickBooks. You must first Restore the QBB backup file into a QBW data file.

When you use the backup and restore commands in QuickBooks, pay careful attention to the on-screen instructions. For example, don't forget to select the floppy (or zip) drive when QuickBooks asks you for the backup filename. If you forget, your backup data will be on your hard drive, no help if that drive ever fails!

At the end of the year, after you've finalized your data file and filed the tax return, you should back up your data to a separate archive diskette (or zip) that will never be touched again. Store this special archive disk in a fireproof safe. Only then, consider condensing your active data file to make it smaller and easier to work with. For details on condensing your file check out our January 1998 newsletter at http://www.sleeter.com/free-newsl.html.

PS: We will be scheduling our one day seminar "QuickBooks for Accountants, Consultant's and Power Users- How to Install, Troubleshoot and Support QuickBooks and QuickBooks Pro" in the San Francisco and Los Angeles areas in early May 1998. For information call 1-888-484-5484 toll free or go to www.sleeter.com

* I recommend that you employ the services of a qualified tax preparer even if you plan to use TurboTax to help you with your return. Interpretation of complex tax regulations that may (or may not!) apply to your particular situation are best handled by a professional. Believe me, it is well worth their fee!

The Mastering QuickBooks Video
Learning System

Two separate videos to meet your needs...

Reduces the Time You Spend Learning

Eliminates Common Errors

Learn at Your Own Pace

Covers both QuickBooks and QuickBooks Pro

Easy, Non-Technical Format

For Beginners and Experienced Users

Details on our Web Site at http://www.sleeter.com or call
Toll Free 1 (888) 484-5484

©1998 The Sleeter Group, Inc. May be photocopied and shared with your associates and clients.

QuickBooks at Tax Time March, 1998

Getting Ready to File your Return		If you have faithfully recorded all of your information in QuickBooks throughout the year, you can now reap the benefits of your labors. All the reports you need for tax time are available to you by simply printing them out and giving them to your accountant. However, there are just a few simple things you must do at the end of each year to ensure your records are accurate, and to archive your information. In my seminars, I teach the specifics of how to complete each of these steps. Make sure you complete each one of them before relying on your reports for the tax return. Reconcile all balance sheet accounts including bank accounts, credit card accounts, loans receivable, loans payable. Print bank reconciliation reports for each bank account. Print and verify A/R and A/P reports (Open Invoices and Unpaid Bills Detail). Look for unapplied payments or credits and if necessary, apply them. If needed, enter adjusting journal entries for depreciation, amortization, prepaid expenses, and unearned income. For partnerships, enter adjusting journal entries to distribute net income to each of the partner’s capital accounts. For sole proprietorships, enter adjusting journal entries to close all Owner’s Drawing and Owner’s Investments into Owner’s Equity. Create and verify the following reports: Profit & Loss, Balance Sheet, Fixed Assets Purchase Detail for the year. If you use TurboTax*, verify that: Each account in your chart of accounts is associated with the correct line on the tax return Create and verify an Income Tax Summary or Income Tax Detail report Launch TurboTax and import your QuickBooks data directly into TurboTax

Understanding QuickBooks Cash Basis Reports		One of the best features of QuickBooks is that it does not lock you into either cash or accrual basis accounting. What this means is you can use accrual basis reports throughout the year for management information, and then choose to use cash basis reports for preparing your taxes. QuickBooks doesn't really keep two sets of books, it just knows how to remove unreceived income and unpaid expenses, allowing you to print the cash basis reports you need. On the cash basis P&L report, QuickBooks omits from income the total of all open invoices that use Items associated with income accounts. (Under many circumstances this is simply the total of all open invoices). Similarly, on a cash basis Balance Sheet, QuickBooks reduces Accounts Receivable by the total of all Open Invoices that use Items associated with income accounts. The same things happens with unpaid bills with the only difference being that expenses and Accounts Payable are reduced on cash basis reports. However, if you find a balance in A/R or A/P on a cash balance sheet, don't panic! Its probably due to one of the following situations. Here is what I teach in my seminars: One or more of the outstanding invoices includes sales tax. In this case, the sales tax portion of the invoice is left in A/R as well as in Sales Tax Payable. This assumes you've set the Sales Tax Preferences for owing sales tax "as of Invoice date". One or more of the outstanding invoices includes an Inventory Part. In this case, the portion of the invoice that involves inventory is left in A/R as well as the Inventory Asset. One or more of the invoices includes an Item that points to a balance sheet account. In most cases this is because the invoice is connected to a balance sheet account and both A/R and the offsetting balance sheet account are left unchanged by the cash basis report. One or more of the unpaid bills includes an Item (or account) that points to a balance sheet account. An example of this situation is a credit card bill. Again, in this case since the bill is connected to a balance sheet account, both A/P and the offsetting balance sheet account (Credit Card payable) are left unchanged. If A/R has a negative balance, it is probably due to invoices not being connected with payments or credit memos. Run an Open Invoices report and look for negative numbers. If you find both positive and negative numbers on this report, use the Receive Payments screen to connect the credits (or payments) to your open invoices. If A/P has a negative balance, it is probably because a bill payment or a bill credit has not been applied to a bill. To fix this, use the Pay Bills screen. The unapplied bill credits or payments will show as negative numbers. To apply a credit to a bill, click on a negative number and a positive number for the same Vendor and click OK or Next.

Prepaid Income and Expenses on a Cash Basis Balance Sheet		Although QuickBooks does a great job of removing invoices and bills when you create a cash basis report, it does not reverse any accruals you make for prepaid expenses or unearned income. In order to create a true cash basis balance sheet, you may need to enter journal entries to reverse accruals for prepaids

Backing up and Archiving your Data		Why back up your data? Because if you don't, the sky will fall and the earth will cease to exist. Does that scare you enough? Maybe its better to consider the positive side of backing up. Although it won't happen very often, when the day comes that you need to recover from a hard disk crash, you'll be so happy that you can recover all your data by simply restoring from your backup. Use whatever reasoning you can to convince yourself that backing up your data is just as important as invoicing your customers or paying your bills. I recommend creating three backup sets. One for Monday, Wednesday, Friday, one for Tuesday, Thursday and Saturday, and a third set for the end of each month. You should use either floppy diskettes, or if your data file is large, consider investing in a zip drive which stores 100 MB on each disk. QuickBooks for Windows uses filename extensions to differentiate between data files and backup files. Data files use the .QBW extension and backup files use the .QBB extension. When you use the Backup command, QuickBooks creates a compressed copy of your data on your backup disk. Also, if your data file is too large to fit on one disk, QuickBooks will split the backup file onto multiple diskettes. The backup filename ends with a .QBB extension. If you ever need to use the backup data again, use the Restore command in QuickBooks. This command converts a backup file (.QBB) into a QuickBooks data file (.QBW). You cannot directly open a .QBB file in QuickBooks. You must first Restore the QBB backup file into a QBW data file. When you use the backup and restore commands in QuickBooks, pay careful attention to the on-screen instructions. For example, don't forget to select the floppy (or zip) drive when QuickBooks asks you for the backup filename. If you forget, your backup data will be on your hard drive, no help if that drive ever fails! At the end of the year, after you've finalized your data file and filed the tax return, you should back up your data to a separate archive diskette (or zip) that will never be touched again. Store this special archive disk in a fireproof safe. Only then, consider condensing your active data file to make it smaller and easier to work with. For details on condensing your file check out our January 1998 newsletter at http://www.sleeter.com/free-newsl.html.

		PS: We will be scheduling our one day seminar "QuickBooks for Accountants, Consultant's and Power Users- How to Install, Troubleshoot and Support QuickBooks and QuickBooks Pro" in the San Francisco and Los Angeles areas in early May 1998. For information call 1-888-484-5484 toll free or go to www.sleeter.com * I recommend that you employ the services of a qualified tax preparer even if you plan to use TurboTax to help you with your return. Interpretation of complex tax regulations that may (or may not!) apply to your particular situation are best handled by a professional. Believe me, it is well worth their fee!

		The Mastering QuickBooks Video Learning System Two separate videos to meet your needs... Reduces the Time You Spend Learning Eliminates Common Errors Learn at Your Own Pace Covers both QuickBooks and QuickBooks Pro Easy, Non-Technical Format For Beginners and Experienced Users Details on our Web Site at http://www.sleeter.com or call Toll Free 1 (888) 484-5484

*©1998 The Sleeter Group, Inc. May be photocopied and shared with your associates and clients.*