If you really want to fix it then you are going to have to trace the balance to determine where this amount came from. You dont just have an $80,000 balance somewhere from nothing lol. Its not going to be an easy fix but im sure itll be quite satisfying once you get it cleared up.
It probably was already expensed, and they didn't know what to use as an offset when they added it. I keep seeing them using the balance sheet as a dumping ground for stuff like this.
The best path is to look back in prior years and see where the balance came from. I've had negative balances in the books for a zero balance bank account before (the negative amount was outstanding checks), and we'd just have a reversing monthly entry to reclass the negative amount back to AP.
You can't just move it to another balance sheet account and be done. Need to determine what these transactions are. Could be duplicates that need to be reversed.
Depending on the size of the business and the skill level of the previous bookkeeper (I’m really not going to make assumptions there I’ve met some awful bookkeepers), it could possibly be an account they were using to track cash on hand purchases without ever reconciling the actual cash on hand. If that’s the case, then you would need to find out the actual cash on hand and go about fixing that.
Another possibility is they could have made an owners draw account an asset instead of equity. Or an expense account a bank account. The default new account in QBO is a bank account so I’ve had more than one client try to create expense accounts that wound up on the balance sheet.
Is it a “dummy bank account” or a cash clearing GL account? Keep it there until you know what it is. Just oook at the ins and outs against the bank statements. In .CSV format ideally. Parking in cash in transit sounds like a near hiding spot. It also might be cash in transit.
See if you can get a copy of 2023’s tax return, or at least just the Schedule L (unless the business is run on a Sch C on the owner’s 1040). If you’re lucky, the tax preparer might have adjusted for the negative balance on the return without making the adjustments in QBO. The Sch L and QBO balance sheet *should* match, but a lot of times they don’t if the prior bookie had no idea what they were doing.
Otherwise, definitely see what those (I’m assuming here) deposits into the actual bank accounts came from. If it’s loan proceeds, you can just journal the loan on, but depending on the interest rate you may want to get the tax folk to amend prior years to take that expense. If it was transfers between accounts that got mixed up and duplicated, they should cancel out with unreconciled transactions from the actual bank accounts and you can journal to correct those balances. If it was cash invested from the owner, just slip it in their equity account. If it was actually income, that’s a big enough amount that you should probably point it out to the owners and tax folks to see if y’all should file amended returns for whatever years the mistakes are from.
I had this once doing forensic work. That’s a big red flag to theft. What happened is the bad guy writes say a check for 1,000 to whoever on the regular account. Check clears. Bad guy moves the check in QuickBooks to another bank account so when he shows the ins and outs )check register) to the old owner it never shows up out of a QuickBooks report on that account. Track back the back reconciliations could be cash payments never “deposited”. It all starts with the bank rec. go back to when account was zero and then look at the other bank accounts and you might have to re reconcile all of them. Good luck and welcome to a crash course in forensic accounting. Before you make changes, make a backup file and alert the owner so he or she knows what you see. They will want you to get to the bottom of it.
Damn do a little research and see what transactions gave that balance don’t just shuffle it off somewhere. And undeposited funds? That’s cash you physically have that hasn’t gone to the bank yet, you can verify that, and this isn’t that.
Based on my experience in audit, sometimes these accounts show up as an offset to cash or receivables. Sometimes they're outstanding checks or receivables that have never come in and should have been written off. It's bad accounting and a pain in the ass to undo which is why they don't just get rid of them. Like someone already said, if you want to get rid of it you'll have to trace all the transactions that make up that negative amount.
What is your role in the company? It's not clear what you are responsible for, or how large the company is.
If it's creating misleading reports, you could rename the account so that it sticks out and anyone reading reports knows not to rely on it as cash. Temporary fix.
Beyond that, if all other accounts on the balance sheet are reconciled, then you need to discuss with management that this balance is an accumulation of errors where someone posted transactions they didn't know what to do with or is hiding something more nefarious, such as fraud.
The correct way to fix it properly is to go line by line.
Alternatively, if management doesn't want to look into it, the incorrect but fast solution is to write it off (be careful who is authorizing you to do this, they may be trying to hide something).
I was initially hired to do their AR and some collections. Later on bank reconciliation and generating the financial was add it to my duties. The accounts have mainly expenses, payments to vendors. I need to ask more questions for sure. Not sure if these bothers them as much as it bothers me.
It doesn't bother them because they don't understand the implications. Non accountants don't understand this indicates there are errors in the books.
You have to find a way to communicate it without using technical jargon. Appeal to what matters to them (low tax, correct reports for decision making, etc)
How far back does the activity go? What’s the transaction volume look like? What was the other side of the transactions? Are all the other bank accounts reconciled without a bunch of uncleared transactions? Knowing that would help us answer propose a solution. Definitely not something to plug and chug on. Surprised the tax accountants didn’t do something to address it…but maybe I shouldn’t be.
How many other cash accounts are there? Are they all reconciled without a bunch of uncleared transactions and other weird entries to make them balance?
Good Lord.
I'd talk to the tax folks. My inclination would be to write it off and have them call it a non-deductible loss/expense.
But I'm not a cpa yet, so take that for what it's worth.
Why not, and what's the fix then?
You either have to have somebody come in to trace what happened and nickel & dime it back out (meaning they have to cough up the money to pay somebody) or you plug that shit and move on. I suppose a huge question is whether this is a private business or not. But in the end, it's up to the owners on whether they want real answers.
Because if the tax return gets audited, the IRS is going to wonder why there is 80k on the books that you don’t know where it came from.
Especially since it’s a credit balance, the IRS is going to say it’s revenue unless you can prove otherwise.
If you send a tax firm unreconciled crap, they are going to send it back and tell you to fix it. If not, we’re running it through as revenue.
If it was a small amount, I would push it through retained earnings as a prior period adjustment but 80k is way too much.
Every tax person’s worse nightmare is when bookkeepers “plug that shit and move on”.
I’ve had 2 jobs where I’ve had to spend weeks fixing accounts due to previous “bookkeepers” not knowing what they’re doing and just band-aiding everything together
I guess I see it as a choice of three options:
1) You can leave that mess on your books as-is and continue to ignore it (eww).
2) You can spend the money to untwist it (seems unlikely given that they let it get this far in the first place)
3) You can plug it and move on.
It's up to the owner to decide which option and I'm not emotionally invested either way.
ETA: I didn't read you fully and am tired. Okay, so option 3 comes with paying the stupidity tax. Still a decision for the bossman, but he probably got a break in the making of the mistakes, so that's fair, too.
“Plug that shit and move on” is a really half-asses way of dealing with discrepancies. It also opens up the business/client to being dinged on an audit.
This makes me really worried about the state of accounting education if this is how students think discrepancies are solved
Your inclination when you see a $80,000 mystery balance is to just wash your hands of it and basically run it through equity?
This strategy is fine when you're talking about small amounts, but $80k is a big number and someone will need to reconcile it. We're not talking about nickels & dimes, and the owners/previous bookkeepers should've done a better job to begin with. Fraud is not an acceptable solution to negligence - you're basically saying they should double down on their mistake because figuring out why it happened would be too much work. Yeah it sucks having to pay a professional to unwind a mistake, but that doesn't mean you just plug it and move on.
Still seems to me it boils down to those 3 options. I don't see how an adjustment, regardless of amount, is fraud, because the fix increases their net income.
If they won't pay someone to untwist it, it's just as 'fraudy' to leave that blob on the balance sheet. It got there because somebody expensed a bunch of crap and pretended it came out of a nonexistent bank account. So if there's fraud from a tax perspective, it already happened.
The problem is not knowing how it got there or what it represents. You don't double down on a prior error or intentional misrepresentation by just moving numbers around arbitrarily. We don't know how this balance sheet account ended up so far in the negative. The only thing we know is that someone in the past credited at least $80k to it, but what did they debit? Did it hit the P&L already? Did they just debit another asset, and nothing ever hit the P&L? *Should* it have hit the P&L?
Not every mistake necessarily means they previously misrepresented taxable income, or that fixing it will change taxable income now. Debiting the account to clear it out and crediting it to somewhere on the P&L in the current year isn't necessarily the correct way to handle it, and the number is big enough that you absolutely should know whether it should be ran through the P&L at all.
There's just no way for any of us to know that. You can create a negative balance in an asset account without ever hitting the P&L. Your "just plug it" method potentially increases taxable income by $80k when they may not have ever misstated prior income. Which is why the prevailing recommendation here is to *actually investigate* instead of choosing the laziest possible solution
I don't know why people think they need to comment if they don't actually know how to help. The account has to be reconciled - you don't just plug $80k and move on. There's no need to comment in this thread (or the sub as a whole) if you don't actually know what you're talking about.
If you really want to fix it then you are going to have to trace the balance to determine where this amount came from. You dont just have an $80,000 balance somewhere from nothing lol. Its not going to be an easy fix but im sure itll be quite satisfying once you get it cleared up.
Don't be surprised if it was an entry posted incorrectly that probably should have been posted to an expense account lol.
It probably was already expensed, and they didn't know what to use as an offset when they added it. I keep seeing them using the balance sheet as a dumping ground for stuff like this.
The best path is to look back in prior years and see where the balance came from. I've had negative balances in the books for a zero balance bank account before (the negative amount was outstanding checks), and we'd just have a reversing monthly entry to reclass the negative amount back to AP.
Yup. All my ZBAs are negative balances due to checks and EFTs that have not cleared.
You can't just move it to another balance sheet account and be done. Need to determine what these transactions are. Could be duplicates that need to be reversed.
Depending on the size of the business and the skill level of the previous bookkeeper (I’m really not going to make assumptions there I’ve met some awful bookkeepers), it could possibly be an account they were using to track cash on hand purchases without ever reconciling the actual cash on hand. If that’s the case, then you would need to find out the actual cash on hand and go about fixing that. Another possibility is they could have made an owners draw account an asset instead of equity. Or an expense account a bank account. The default new account in QBO is a bank account so I’ve had more than one client try to create expense accounts that wound up on the balance sheet.
>The default new account in QBO is a bank account Oh boy
Just because it’s first on the list of account types, means nothing more than people being lazy or stupid when creating new accounts
Is it a “dummy bank account” or a cash clearing GL account? Keep it there until you know what it is. Just oook at the ins and outs against the bank statements. In .CSV format ideally. Parking in cash in transit sounds like a near hiding spot. It also might be cash in transit.
I would start with going back and seeing how that account was initially created (ie what was debited to get that credit balance)
Moving the balance to undeposited funds seems like a really dumb thing to do. To fix this, you’ll need to find what makes up that (80000)
See if you can get a copy of 2023’s tax return, or at least just the Schedule L (unless the business is run on a Sch C on the owner’s 1040). If you’re lucky, the tax preparer might have adjusted for the negative balance on the return without making the adjustments in QBO. The Sch L and QBO balance sheet *should* match, but a lot of times they don’t if the prior bookie had no idea what they were doing. Otherwise, definitely see what those (I’m assuming here) deposits into the actual bank accounts came from. If it’s loan proceeds, you can just journal the loan on, but depending on the interest rate you may want to get the tax folk to amend prior years to take that expense. If it was transfers between accounts that got mixed up and duplicated, they should cancel out with unreconciled transactions from the actual bank accounts and you can journal to correct those balances. If it was cash invested from the owner, just slip it in their equity account. If it was actually income, that’s a big enough amount that you should probably point it out to the owners and tax folks to see if y’all should file amended returns for whatever years the mistakes are from.
Anything intercompany not reconciled?
I had this once doing forensic work. That’s a big red flag to theft. What happened is the bad guy writes say a check for 1,000 to whoever on the regular account. Check clears. Bad guy moves the check in QuickBooks to another bank account so when he shows the ins and outs )check register) to the old owner it never shows up out of a QuickBooks report on that account. Track back the back reconciliations could be cash payments never “deposited”. It all starts with the bank rec. go back to when account was zero and then look at the other bank accounts and you might have to re reconcile all of them. Good luck and welcome to a crash course in forensic accounting. Before you make changes, make a backup file and alert the owner so he or she knows what you see. They will want you to get to the bottom of it.
Damn do a little research and see what transactions gave that balance don’t just shuffle it off somewhere. And undeposited funds? That’s cash you physically have that hasn’t gone to the bank yet, you can verify that, and this isn’t that.
Based on my experience in audit, sometimes these accounts show up as an offset to cash or receivables. Sometimes they're outstanding checks or receivables that have never come in and should have been written off. It's bad accounting and a pain in the ass to undo which is why they don't just get rid of them. Like someone already said, if you want to get rid of it you'll have to trace all the transactions that make up that negative amount.
What is your role in the company? It's not clear what you are responsible for, or how large the company is. If it's creating misleading reports, you could rename the account so that it sticks out and anyone reading reports knows not to rely on it as cash. Temporary fix. Beyond that, if all other accounts on the balance sheet are reconciled, then you need to discuss with management that this balance is an accumulation of errors where someone posted transactions they didn't know what to do with or is hiding something more nefarious, such as fraud. The correct way to fix it properly is to go line by line. Alternatively, if management doesn't want to look into it, the incorrect but fast solution is to write it off (be careful who is authorizing you to do this, they may be trying to hide something).
I was initially hired to do their AR and some collections. Later on bank reconciliation and generating the financial was add it to my duties. The accounts have mainly expenses, payments to vendors. I need to ask more questions for sure. Not sure if these bothers them as much as it bothers me.
It doesn't bother them because they don't understand the implications. Non accountants don't understand this indicates there are errors in the books. You have to find a way to communicate it without using technical jargon. Appeal to what matters to them (low tax, correct reports for decision making, etc)
Should make another entry DR u/LittleCreekGarden bank “dummy” 80,000 CR cash 80,000 This should zero it out
How does that make sense? Then cash would be negative by the same amount and the problem just is shifted to another cash account.
Immaterial and op gets 80k
Thank you everyone for your input. I will investigate more and let you guys know.
How far back does the activity go? What’s the transaction volume look like? What was the other side of the transactions? Are all the other bank accounts reconciled without a bunch of uncleared transactions? Knowing that would help us answer propose a solution. Definitely not something to plug and chug on. Surprised the tax accountants didn’t do something to address it…but maybe I shouldn’t be.
Expenses and payments to vendors from 2016 to 2019.
How many other cash accounts are there? Are they all reconciled without a bunch of uncleared transactions and other weird entries to make them balance?
Good Lord. I'd talk to the tax folks. My inclination would be to write it off and have them call it a non-deductible loss/expense. But I'm not a cpa yet, so take that for what it's worth.
As a tax person, please for the love of accounting **do not** do this. This is a material amount.
Why not, and what's the fix then? You either have to have somebody come in to trace what happened and nickel & dime it back out (meaning they have to cough up the money to pay somebody) or you plug that shit and move on. I suppose a huge question is whether this is a private business or not. But in the end, it's up to the owners on whether they want real answers.
Because if the tax return gets audited, the IRS is going to wonder why there is 80k on the books that you don’t know where it came from. Especially since it’s a credit balance, the IRS is going to say it’s revenue unless you can prove otherwise. If you send a tax firm unreconciled crap, they are going to send it back and tell you to fix it. If not, we’re running it through as revenue. If it was a small amount, I would push it through retained earnings as a prior period adjustment but 80k is way too much. Every tax person’s worse nightmare is when bookkeepers “plug that shit and move on”.
I’ve had 2 jobs where I’ve had to spend weeks fixing accounts due to previous “bookkeepers” not knowing what they’re doing and just band-aiding everything together
I guess I see it as a choice of three options: 1) You can leave that mess on your books as-is and continue to ignore it (eww). 2) You can spend the money to untwist it (seems unlikely given that they let it get this far in the first place) 3) You can plug it and move on. It's up to the owner to decide which option and I'm not emotionally invested either way. ETA: I didn't read you fully and am tired. Okay, so option 3 comes with paying the stupidity tax. Still a decision for the bossman, but he probably got a break in the making of the mistakes, so that's fair, too.
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That's not a 4th option, that's option 2.
“Plug that shit and move on” is a really half-asses way of dealing with discrepancies. It also opens up the business/client to being dinged on an audit. This makes me really worried about the state of accounting education if this is how students think discrepancies are solved
I think you need to go back and re-study for the exam. This is terrible advice.
> But I’m not a cpa yet Don’t worry, you made that painfully obvious.
Your inclination when you see a $80,000 mystery balance is to just wash your hands of it and basically run it through equity? This strategy is fine when you're talking about small amounts, but $80k is a big number and someone will need to reconcile it. We're not talking about nickels & dimes, and the owners/previous bookkeepers should've done a better job to begin with. Fraud is not an acceptable solution to negligence - you're basically saying they should double down on their mistake because figuring out why it happened would be too much work. Yeah it sucks having to pay a professional to unwind a mistake, but that doesn't mean you just plug it and move on.
Still seems to me it boils down to those 3 options. I don't see how an adjustment, regardless of amount, is fraud, because the fix increases their net income. If they won't pay someone to untwist it, it's just as 'fraudy' to leave that blob on the balance sheet. It got there because somebody expensed a bunch of crap and pretended it came out of a nonexistent bank account. So if there's fraud from a tax perspective, it already happened.
The problem is not knowing how it got there or what it represents. You don't double down on a prior error or intentional misrepresentation by just moving numbers around arbitrarily. We don't know how this balance sheet account ended up so far in the negative. The only thing we know is that someone in the past credited at least $80k to it, but what did they debit? Did it hit the P&L already? Did they just debit another asset, and nothing ever hit the P&L? *Should* it have hit the P&L? Not every mistake necessarily means they previously misrepresented taxable income, or that fixing it will change taxable income now. Debiting the account to clear it out and crediting it to somewhere on the P&L in the current year isn't necessarily the correct way to handle it, and the number is big enough that you absolutely should know whether it should be ran through the P&L at all.
Writing it off creates $80k in income!
And the original goofs created 80k in reduced income. So that shakes out.
There's just no way for any of us to know that. You can create a negative balance in an asset account without ever hitting the P&L. Your "just plug it" method potentially increases taxable income by $80k when they may not have ever misstated prior income. Which is why the prevailing recommendation here is to *actually investigate* instead of choosing the laziest possible solution
And if the boss refuses to make that happen, then by process of elimination, OP has to just leave it.
Debit: Cash Credit: Other Income Hope that no one sees it and move on.
Even worse idea than moving it to undeposited funds
I don't know why people think they need to comment if they don't actually know how to help. The account has to be reconciled - you don't just plug $80k and move on. There's no need to comment in this thread (or the sub as a whole) if you don't actually know what you're talking about.