Accounting can be a challenging field to work in. The hours are long. We don’t turn heads at parties the way doctors, lawyers, and bankers do. And our most difficult clients often don’t understand what value we’re providing for our fees. Even worse, claim those clients, they can do the work themselves and save themselves those fees, which they can then spend building up their businesses and personal wealth.
Then comes tax season, audit time, an investment opportunity, a loan application, or various other situations involving those clients’ financials – and they need a professional accounting advisor. And much of the value the advisor provides comes from correcting the clients’ mistakes.
Professional bookkeepers and accountants often see the same errors, year after year, in their clients’ books. Before they can provide any of their core tax or advisory work, they have to clean up those errors. Here are some of the most common errors they find:
1. Balance sheet account balances at the period beginning don’t agree with last period’s ending balances.
It’s not uncommon, at the end of a tax or audit engagement, for accountants to give their clients adjusting journal entries to make at their ends to their books. Once the clients have posted those adjusting journal entries, their balance sheet account balances as of the end of the period should agree with the accountants’. But too many clients don’t bother making those entries. One of the first things an accountant has to check is whether those balances agree, especially for equity accounts. If those balances don’t agree, the accountant must make backdated entries to bring the opening balances into agreement. The accountant must also make reversing entries in asset and liability accounts wherever required to remove their effects at the beginning of the period.
2. Bank and brokerage accounts are not reconciled.
What do clients do when they receive their bank and brokerage statements? With luck, the clients have reconciled the accounts within their accounting applications to the statements. They will expense any bank charges and record any interest, dividends, royalties, capital gains and losses, and other investment income in their books. But all too often, they just shove their statements into boxes without even opening the envelopes. Then the accountant has to open the statements, record any missing transactions, and then reconcile the accounts.
3. The client has expensed fixed asset and credit card payments.
Payments for fixed assets should be capitalized and depreciated over their useful life. But are clients doing that? Clients who are not knowledgeable about accounting may charge fixed assets to expense accounts. All costs associated with acquiring a fixed or intangible asset and putting it into service should be capitalized, but clients may be capitalizing only base amounts.
They also may not be treating credit card transactions correctly. They may be recording payments on credit card balances as expenses rather than reductions of current liabilities. Those payments need to be reclassified depending on the payees and the expenditures. A payment for a fixed asset needs to be capitalized. Interest charged needs to be expensed. Credits on the statement need to be charged to the same accounts as the items that are being reversed. And depreciation needs to be charged to fixed assets.
4. The client has misclassified a capital lease as an operating lease.
If clients are renting equipment or vehicles, are they merely recording the rental payments as expenses? Or do those leases qualify as capital leases? If so, the assets and corresponding lease liabilities for the present value of the items must be capitalized on the balance sheet. The lease payments must be classified as debits against the lease liabilities, net of imputed interest expense, and the assets must be depreciated.
To qualify for capital lease treatment, a lease must meet one of four conditions:
- The lease contains a bargain purchase option.
- The ownership of the item transfers to the client at the end of the lease term.
- The lease term is 75% or more of the asset’s useful life.
- The present value of the lease payments is 90% or more of the asset’s fair market value.
5. The client has made errors in recording its payroll.
This is an area where it’s an understatement to say that client mistakes happen frequently. Are your clients recording only net paychecks as salaries and wages? Are they recording their employees’ payroll tax withholding as the clients’ own expenses? Are they making timely payroll deposits in the legally mandated manner? Are they treating expense reimbursements or owner withdrawals as compensation? Are the quarterly and annual filings correct? These questions don’t even take into account whether their staff members are being properly treated as employees and contractors.
6. The client is not properly accounting for inventory or cost of goods sold.
Are your clients properly capitalizing the costs of inventory? For manufacturing clients, those include raw material costs as well as direct labor and overhead. Once the manufacturing process starts, these move to work-in-process and then finished goods inventory. For merchandising clients (including e-commerce clients), inventory consists of goods for sale or resale.
Your client needs to include in its inventory goods in warehouses, consigned goods not yet sold, and goods in transit whose ownership has not yet transferred to the purchasers. This final category includes goods shipped FOB shipping point that have not yet reached the shipping point and goods shipped FOB destination that are in transit to the final destination.
Is your retail client consistently using the right costing method (FIFO, LIFO, weighted average, specific identification)? Has it properly accounted for spoilage or shrinkage? Are they recording sales or purchase discounts? There’s a lot to unpack (sometimes literally!) with inventory-related issues.
7. The client is not recording depreciation or amortization expense properly (or at all).
Clients often don’t record depreciation or amortization on their fixed or intangible assets respectively (or they don’t do so consistently). Perhaps they have an out-of-date fixed assets schedule, or none at all. Maybe they didn’t properly compute the amounts to be expensed. Maybe they are waiting to the end of the period to record depreciation and amortization and not allocating these expenses over the period. Or they continue to record these expenses after the assets’ useful lives has expired or the book value has been reduced to zero.
8. The client is not accounting for sales and use tax appropriately.
Is your client subject to sales and use tax? Does your client owe sales and use tax to more than one state or jurisdiction? Do they receive a credit for paying before the due date? Is your client filing correct sales and use tax returns using the proper methods? Does your client compute its sales and use tax liability using the correct rate? Errors in sales and use tax reporting and payment can trigger state or local audits.
9. The client is not keeping financial records properly.
Clients coming in with boxes and envelopes full of receipts that haven’t been sorted, let alone entered into the books, are an accountant’s recurring nightmare. This is where apps like Dext come in. Your client can use an integrated app to track expenses and directly download them into accounting applications like QuickBooks.
Of course, there are more mistakes that clients make. Clients don’t usually want to pay extra for their accountants to straighten out their records. But accountants earn their fees by cleaning up these errors and presenting their clients with correct financials that properly portray their client’s earnings, financial positions and cash flows. Reassure your clients that by taking on the cleanup work, you have their backs – and earn their trust.