The Price of Cheap Bookkeeping

I recently worked with a new client who is an interior designer. Of course, the book was not good as expected.

I found that in 2010, there was  $20,000 sitting in a bank account named "uncancellable." Obviously, there is no such bank, hence no such deposit. Her cash balance was inflated by that amount. By tracing the entries, I realized that the deposit was posted and incorrectly applied to various invoices issued in May and September 2010. This was not true --  her client always paid right then and there. Her invoices were due-on-receipt. The deposit entry has been reconciled to the bank statement. The former bookkeeper realized the mistake, and posted another payment to apply to the correct invoice issued in August. And she moved this payment into this "uncancellable" bank account with memo "already reconciled. can not delete."

The result; the income was counted twice, which cost my client $6000+ for Federal and California taxes.

Curious, after quick glance at 2010 tax return, I pulled out 2011 tax returns. And the sales and net income were $50,000 more than book. Minutes later, I realized the tax returns were filed based on accrual instead of cash basis for there was $50,000 sitting in Accounts Receivable. Worse yet, these A/R invoices would never be collected, for there was procedural error. Her clients were presented with invoices showing 100% of material and service costs, and were asked to pay 50% upfront while placing order for the materials. The remaining 50% was billed again on later invoices, and were paid promptly when presented. So the first invoices with remaining balance would never be paid.

We were in time to amend 2010 and 2011 tax returns and reduced her Federal and California taxes by $6000 in year 2010 and $20,000 in year 2011.

That was the price of $25/hour bookkeeping.

To find a good bookkeeper, business owners should definitely ask for a professional with an accounting degree. The knowledge of accounting principles is much more important than Quickbooks, for one can learn software much faster.

Business owners do not have to stand behind their accountants/bookkeepers to micro-manage. But, when each month ended, it is sensible to ask for monthly reports such as Balance Sheet and Profit and Loss. And if the business owners do not know what those numbers mean, have the bookkeeper to review with. Since the business owner runs the business and have "reality check", if the numbers are way off, they should be able to tell.