Creating “Hidden” Year‐End Adjustments In QuickBooks
At the end of each fiscal year, you will need to make several types of edits and adjustments to your clients’ QuickBooks data files. These adjustments fall into two categories:
At the end of the year you will often have to make numerous corrections to the client’s data file. You can make these corrections at the transaction level (which is very time consuming), or you can make adjustments to correct the Trial Balance as of the last day of the fiscal year. Examples of corrective adjustments include:
- Corrections to list information where some of these changes will impact the QuickBooks General Ledger (e.g., the Accounts the client used when setting up Items)
- Corrections to individual transactions
- Entering individual transactions (other than Adjusting Journal Entries)
- Clearing balances that are left over in the client’s file due to an incorrect or incomplete file setup
- Entering Journal Entries to complete the client’s bookkeeping, like recording interest expenses
- on loan payments (where the client booked the entire balance to principal) or recording
- depreciation expense on the client’s fixed assets.
All of the adjustments above increase the accuracy of the client’s QuickBooks file for management purposes. In other words, these entries can remain a permanent part of the client’s QuickBooks file without creating any management reporting problems.
Tax Adjustments and Financial Reporting Adjustments
You will often enter Journal Entries to adjust year‐end balances for reasons that are specific to the client’s income tax returns and/or that are required for you to present financial statements to third parties (e.g. banks and other lenders). For the purposes of this text, we will categorize these types of entries as follows:
1. Entries necessary to alter the balances for tax issues like deferred revenues so the QuickBooks Trial Balance ties to the income tax return.
2. Entries necessary to alter the reporting basis in QuickBooks. QuickBooks has a cash/accrual conversion feature that allows you to convert most of the Profit & Loss from one basis to another, but most of the Balance Sheet (except A/R and A/P) does not convert and some of the Profit & Loss does not convert. As a result, you will have to complete the cash/accrual conversion using Journal Entries.
The issue: When you enter tax adjustments or when you enter adjustments to complete the cash/accrual conversion, the client cannot use the QuickBooks file effectively for management reporting. For example, if you enter adjustments to complete the conversion in QuickBooks from accrual to cash (e.g. to prepare a cash basis income tax return), the client can no longer create accurate accrual basis reports as of the last day of the year.
Two Options for “Hiding” Selected Year End Adjustments
Option 1: Enter, Report, Memorize and Delete
Once you have completed adjustments for the income tax return, you can print reports, export to Intuit income tax return preparation software (if applicable), memorize the year‐end adjustments that you don't want reflected on the management reports and then delete these adjustments.
Adv Tip - Hidden Option 1 Tip
By memorizing the entries and then deleting the entries, you create the following benefits:
1. If the client is ever audited, you or the client can instantly restore the income tax balances to the data file by entering the memorized transactions.
2. When you use the client's data file in subsequent years to prepare the next year's return, you can quickly re‐enter the prior year tax adjustments to give you Beginning Balances that tie to the previous year(s) tax returns.
3. With this method you use just QuickBooks to do all of your year‐end entries – no additional Trial Balance program or spreadsheet program is required.
4. If you integrate QuickBooks with Intuit tax preparation software, you have the balances in QuickBooks.
Adv Tip - Hidden Option 1 Note
Option 2: Filter Management Reports to Exclude Adjusting Entries
QuickBooks Accountant and all editions of QuickBooks Enterprise Solutions include a check-box allowing you to flag entries as “Adjusting Journal Entries.”
If you use this check-box only for those entries you want to exclude from management reporting, you can then filter the Balance Sheet, Profit & Loss and Trial Balance reports as shown below:
Adv Tip - Hidden Option 2 Illustration
Though this option is much easier to manage, especially over multiple years, there are some drawbacks:
- Only filtered reports work for management reporting. So, the client will need to consistently use your customized, filtered reports (not the default reports in the Reports drop-down menu).
- If there are any other Journal Entries flagged as Adjusted Entries in the file, those entries will show on the unfiltered reports – causing management reports to be distorted. This is especially troublesome if the client uses QuickBooks Enterprise Solutions, as they might inadvertently check the “Adjusting Entry” box throughout the year. Tip: Your can run an “Adjusting Journal Entries” report periodically to locate and correct these entries before creating management reports.
- You cannot use the “Adjusting Entry” check-box for its intended purpose – to track the adjustment you make to the file separately from the operational level journal entries the client may enter throughout the year.
- If you make adjustments to the file on transactions other than Journal Entries (e.g., to adjust both accounts and items on the same transaction), you cannot use this trick.