What Clean Bookkeeping Look Like: Five Checks to Run in QuickBooks Online
Key Takeaways
- Categorizing transactions and bookkeeping are not the same thing. Thinking it is can lead to incorrect tax filings, penalties, and audit risks.
- Bookkeeping has two main processes
- Categorizing: Putting sales and expenses in the right buckets
- Reconciliation: Making sure your transactions actually match reality
- Checking your balance sheet against your bank statement can help ensure your books reflect reality.
When you’re trying to maintain your books yourself or have handed them off to a bookkeeper, it’s easy to think that if the bank feed is clear and your transactions are organized, your books are complete.
While categorizing is an important first step, clean books go one step further: every balance on your balance sheet matches a statement from someone outside your business, like your bank, your lender, or your sales reports. When those balances match your balance sheet, you can trust your profit number for taxes, loan applications, and decisions about hiring and pricing.
At Nguyen & Co. CPA, we’ve cleaned up the bookkeeping for 91 businesses in the last year alone. This blog covers a few things we see consistently.
Why Categorized Books Can Still Be Wrong
Your profit and loss statement (P&L) shows money in, money out, and what's left over for a period. Your balance sheet is a snapshot of what you own and what you owe, on a given day.
Every transaction appears on both reports, because each one has two sides: the account the money moved through (balance sheet) and the category that explains why it moved (P&L)
When you categorize a transaction, you’re putting it in a category. But categorizing doesn't confirm that each transaction appears once, that nothing is missing, or that the category is right.
These are the problems we see most often in “fully categorized books”.
|
What happens |
How it impacts your business |
|---|---|
|
A customer's invoice payment was categorized as sales |
Counts the sale twice and leaves the invoice showing as unpaid – inflates revenue which leads to higher taxes. |
|
A loan payment was categorized in full as an expense |
Makes expenses look higher, since only the interest is an expense. Tracking this incorrectly can lead to an audit. |
|
A transfer between your own accounts, or personal money you added, was categorized as income |
Makes profit look higher, so you could pay tax on money that was already yours |
|
A bank connection stopped syncing for a few weeks |
Leaves transactions missing while the feed shows nothing to review. You could report incorrect numbers to the government (audit risk) or report fewer expenses (higher tax) |
Five Checks That Show Your Books Are Truly Clean
To know if you’re books are actually clean here are 5 places to check:
1. Your bank and credit card accounts are reconciled
Reconciling means matching QuickBooks to your bank or credit card statement, transaction by transaction, until the difference is $0.00. In QuickBooks Online, open Reconcile from the Accounting menu and select History by account. Every account should show a completed reconciliation through last month's statement.
In the latest report, uncleared transactions older than 60 days often point to a duplicate or a payment that never happened. An account called Reconciliation Discrepancies means someone forced a reconciliation to balance, so the real error is still in your books.
2. Your holding accounts are empty
Holding accounts are temporary places where QuickBooks keeps transactions until they're sorted. Look for these accounts on your month-end Balance Sheet and P&L.
|
Account |
What a balance usually means |
|---|---|
|
Uncategorized Income, Uncategorized Expense, Uncategorized Asset |
Transactions that were added without a category |
|
Ask My Accountant |
Questions that were never answered |
|
Payments to deposit (called Undeposited Funds in older versions) |
Customer payments that were never matched to a bank deposit, which often means sales were counted twice |
|
Opening Balance Equity |
Setup balances never moved into your owner's equity, the part of the business that belongs to you |
A few days of recent card sales in Payments to deposit is normal. Everything else on this list should be zero.
3. Your customer and vendor balances are accurate
Accounts receivable (A/R) is money customers owe you. Accounts payable (A/P) is money you owe vendors. In Reports, run the A/R Aging Summary and the A/P Aging Summary, which group open balances by how long they've been open.
Invoices over 90 days old have often been paid already, with the payment recorded as new sales. Negative balances usually mean a payment was never applied to an invoice.
4. Your loans and tax balances match their statements
Each loan should match the principal, the amount you still owe before interest, on your lender's latest statement. If a loan balance hasn't moved since you borrowed the money, your payments are being recorded as expenses instead of split between interest and principal.
Your payroll liabilities, the payroll taxes you've withheld or owe but haven't paid yet, should match your payroll provider's reports. Sales tax payable should match what you'll owe on your next sales tax return.
5. Last month is locked
Once a month is reconciled and reviewed, set a closing date so it can't change by accident. In QuickBooks Online, go to Settings, then Account and settings, then Advanced. Under Accounting, turn on Close the books, enter the last day of the month, and choose the option that requires a password. This keeps the numbers you've shared with your lender or tax preparer from changing.
Example: A Long Beach Pet Supply Store
Before: A Long Beach pet supply store with $1.4 million in revenue categorized its bank feed every week. Its point of sale system sent each day's card sales to QuickBooks. The bank deposits arrived minus card fees, so the amounts never lined up and QuickBooks didn't suggest a match. On busy weeks, the bookkeeper categorized those deposits as sales. Every bank account still reconciled, because the cash in the bank was right. By December, Payments to deposit held $38,000 of sales that had been counted twice.
The fix: The owner hired a full-cycle accounting firm where the bookkeeper matched each deposit to that day's sales and recorded the card fees as an expense.
The store set its point of sale connection to record fees with each day's sales, so deposits line up automatically .
The accountant double checks Payments to deposit every month.
The result: Reported sales came down by $38,000, which was profit that never existed and would have been taxed. Payments to deposit now closes each month under $4,000, about one day of card sales.
Example: A Sacramento Marketing Agency
Before: A Sacramento marketing agency with $2.6 million in revenue billed its clients through QuickBooks invoices. Client payments were categorized in the bank feed as income instead of matched to those invoices. The A/R Aging Summary showed $310,000 owed, and the owner was planning a new hire around that cash. When the bookkeeper checked each balance with the account managers, $214,000 had already been paid and counted twice as revenue.
The fix: The owner hired a full-cycle accounting firm where the bookkeeper matched each payment to its invoice and removed the duplicate income. Clients now pay through the link on each invoice, so payments apply to the right invoice automatically . Each account manager reviews their clients' balances with the owner every month and the accounting firm double checks A/Rs each month.
The result: True A/R was $96,000, and revenue came down by $214,000 before the agency filed its taxes. The owner moved the hire back one quarter, until collections supported it, and the agency avoided paying tax on income it never earned.
Quick Checklist
Answer yes or no to each question.
- Is every bank and credit card account reconciled through last month's statement?
- Are your holding accounts, like Uncategorized Income and Payments to deposit, at or near zero?
- Would every customer on your A/R Aging Summary agree with the balance shown?
- Does each loan balance match your lender's latest statement?
- Is last month locked in QuickBooks with a password-protected closing date?
If you answered no to two or more questions, now is a good time to review your balance sheet, before year-end and your next tax filing.
Know Your Books Are Clean
If you've categorized everything and want to know whether your books are clean, talk to our team. We'll run these five checks with you, show you exactly what needs fixing, and set up a monthly close that keeps your numbers right.