Having used QuickBooks for my own personal bookkeeping since
it was first introduced by Intuit, as well as
working with several clients using QuickBooks, I have noticed many people not using
some of its more useful features. Using these features allows a much more
complete accounting for income and expenses and will save income taxes, speed up
the tax return preparation process, and allow for much more useful information
for decision making during the year.
This set of tips is not endorsed by Intuit, the maker of QuickBooks. I have no
financial interest in QuickBooks as either a stockholder nor as a retailer of the
program. It is also not intended as an exclusive list of tips, nor as an example
of the only way things should be done. However, if you, or whoever does your
bookkeeping, were to incorporate these ideas into your procedures, you will be
more than satisfied. Some of these tips will address accounting and tax related
matters that are not specific to QuickBooks.
I should also mention that my experience with QuickBooks has been completely on
DOS and Windows systems. My understanding is that Mac versions have similar
features. I intend for this guide to be an evolving document. If you find any of
the material to be overly confusing or if you have any other comments, please
let me know.
SEPARATE FILES It is very important to use a separate QuickBooks file for each tax return
(i.e. 1120, 1065 or 1040). Multiple businesses on the same tax return, such as
more than one Schedule C, E or F, should be in the same file, but with different
classes designated for each. It is very easy to switch between files with the
"Open" command. In fact, it saves a lot of time if you add the
"Open" icon to your icon bar. This helps prevent any IRS accusations
of commingling and allows a better picture of each tax return. Since C
corporations are allowed to have a fiscal year ending at a different time than
the December 31 year end which is required for individual, partnership & S
corporation returns, combining them in one QuickBooks file makes a real mess. When
you set up your QuickBooks file, the program does assume that your year ends on
December 31. If it doesn’t, make sure you set up the proper fiscal year end in
the "Settings" section of the "Options" selection under
"Edit." This will speed up the production of reports for the current
or past year.
While most of the newer versions of QuickBooks have a fairly simple built in
function for closing out a past fiscal year, I don’t think most people need to
do that. When you close out the past year, it sets up a separate file for the
activity through the past year-end and a new one beginning from the start of the
current fiscal year. QuickBooks has a very powerful and simple to use reporting
capability that allows super fast customization of dates to cover. There are
times when you will need to run reports that cross over fiscal year boundaries.
For example, I often advise setting up corporations on fiscal years different
than the calendar year that individuals are required to use. For the corporation’s
income tax return, the normal fiscal year profit & loss statement will do
the job. However, for payroll reports (W-2s & 1099s), the calendar year is
the only acceptable time period to use. Leaving your QuickBooks file open to cover
many years will allow very rapid production of almost any conceivable reports
you may want to make. QuickBooks also has the capability to produce comparative
reports, showing the activity for the current year side by side with the same
period in the previous fiscal year. It will give dollar and percentage changes.
If you were to close out the prior year, no such report would be possible.
I have several different companies set up on my QuickBooks. Until a few years
ago, the only one which I used to close out each year and start new files was my
personal file. The only reason I did that was that I have so many transactions
that by November or December each year, the backup will no longer fit on one
floppy disk. By starting a new file for the new year, I was then able to do the
entire backup on one disk again, at least for nine or ten months. For all of the
other companies, I have several years included in each file. I have found it
very useful to have these extra years in the same file for doing multiple year
CREDIT CARDS & LOANS
Many people post all of their credit card payments to one big expense
category, "Credit Card Payments." That is improper in regard to both
categorization and timing. There are two ways to account for credit card
payments. The quick and dirty way is to split each payment up between the
different categories of expenses included on that bill. This only works for
categorization when you pay off the credit card in full each month, but is still
wrong for timing because IRS allows deductions to be claimed as of the date a
credit card charge was incurred, not as of the payment date.
The proper way to account for credit card activity is to set each one up as
its own credit card account on your balance sheet. Each time you make a charge,
you enter that into that card’s account register, properly categorizing it as
of the date of the charge. When you receive your credit card statement, use the
built in reconcile feature to balance out the card’s activity, pick up any
finance charges and schedule a payment. When the check is written, it is charged
against the credit card account on the balance sheet. A reminder of the often
overlooked interest tracing rule. Contrary to popular belief that credit card
interest is nondeductible personal interest, any finance charges follow the path
of the charges. If the charges were for business expenses on your Schedule C,
any related finance charges should be deducted on that same schedule. Use the
Class function to see that it goes to the proper schedule.
Loan proceeds borrowed and
principal payments made are nontaxable events. Set up each loan and credit card
as its own separate liability account so that you can keep track and reconcile
its balance. When you make a loan payment, split the payment between the
principal portion (post to the liability account) and the interest portion (post
to interest expense). If you don’t know the exact breakdown, use an estimate
and correct it later. The same concept applies to loans receivable you may have,
such as seller financing on properties you sold.
Even if they are going to be expensed under
assets need to be posted to the appropriate Fixed Asset account, and not to
an expense account.
One of the most commonly overlooked sources for deductions is payments made
in cash, where there is no cancelled check or credit card statement. Capturing
this information is the tricky part. You need to get in the habit of writing
down the cash expenditures in something like your planner or calendar. When you
next work on QuickBooks, you can enter it into your computer.
How the transactions should be shown on your QuickBooks is another often
mishandled area of bookkeeping. An asset account should be set up for Cash on
hand. When you obtain cash by cashing a check or using an ATM, you should make
an entry in that bank account, but instead of charging it to an expense a
category, code it to the Cash account. Technically, such a transaction is really
just a transfer from money in your bank account to money you have in cash. Now,
to post the use of that money, you need to open the register for the Cash
account and post the payments just as you post checks and credit card charges,
with appropriate categories and classes. Likewise, if you receive any income in
the form of cash that is not deposited into a bank, you should enter it into the
Cash account register, with the appropriate income category and class.
With QuickBooks’ built-in reconciliation function, there is no excuse for
not balancing your bank accounts and credit card statements every month. Timely
reconciliation is crucial in case an error has been made by your bank or the
credit card company. You often only have 30 to 60 days in which to demand that
such errors are corrected.
One aspect of effective cash management is paying your bills as late as
possible before incurring any late fees or additional finance charges. Before I
started using Quicken, I used to pile up all of my mail received during tax
season and not get to it until after April 15. It cost me a considerable amount
in late charges and did complicate things later when I applied for loans. (Side
note: These normally fatal black marks on credit report are explainable. When I
pointed out the timing of the late payments, during tax season, as well as
promised not to do it again now that I had Quicken, the lenders agreed to
overlook this problem.)
Whether you use QuickBooks to print your checks or just enter the information
after the fact, you can still schedule payments to be made on the computer.
After you write the check, just enter the check number in the "Num"
column in place of "Print." Everything else has already been entered.
QuickBooks comes pre-configured with most of the normal financial statements.
However, it is very easy to specially configure the reporting function to give
much more useful information. Year-end reports sorted by payees are extremely
useful for 1099 preparation. I normally include a copy of each person’s
QuickBooks listing of payments with the 1099s I send out. A profit and loss with
each column a different class is the best tool for tax return preparation. Once
you have the report configured as you like it, memorize that report by hitting
"Control-M". Make sure to give it a name that you will recognize
because it might be a year before you use it again.
Entries into accounts can be modified after the fact to enable the
preparation of some very useful reports. For example, Sherry’s
Tax Free Exchange Corporation holds millions of dollars in trust for clients to reinvest.
I wanted to use QuickBooks to keep track of each client’s funds balance without
having to keep separate records. QuickBooks doesn’t allow a report of an account’s
activity to be sorted by the memo field, which is where I include the client’s
name for checks written and wires sent. I found that I could go into the
liability account I have set up for client trust funds and reverse the memo and
payee entries (using Windows copy & paste) so that the client’s name was in
all of the payee fields for all of the activity related to him. I configured
(and memorized) a report to list all of the activity in the Client Trust Funds
sorted and subtotaled by Payee. It allows me a perfect reconciliation of exactly
how much money we are holding for each client.
This is a lesson I have had to learn the hard ways. Anyone who has used a
computer for more than a few months knows that it is not a matter of if
your hard disk will crash or your data file will become unusable, but a matter
of when. I have used several different tape and optical disk backup
systems for my hard drives. None of them have been 100% reliable in terms of
restoring QuickBooks data files. You can configure the program to remind you to
back up the file. For the past few years, I have developed a habit of popping
the backup floppy disk into the computer at any time I work on a QuickBooks file.
Before exiting the program or switching to another company, I always force a
backup. In fact, I added a backup icon to my icon bar in order to make the
backup process even faster.
PRINT CHECKS WITH QuickBooks
This will save you so much time, you’ll kick yourself for not doing it
earlier. I know because that’s exactly how I felt after I set up my checks on
Quicken. I waited until after April 15 and it ended up only taking me about an
hour. Considering that I write over 100 checks per month, most of which are to
the same parties, the time savings have been stupendous. Over the past several
upgrades to the Quicken program, the automatic memorization capabilities have
become so powerful that it is almost like magic. I have only used this with
laser and ink-jet printers. It is possible to print checks on pin-feed dot
matrix printers, but the task of aligning the checks and print heads always
seemed to be a bit of a hassle. Prices for printers have dropped so much in the
past year that most people are now using a sheet feed printer, such as a laser
While you can buy preprinted check stock from Intuit or most other business
supply sources, such as McBee, I recently started printing my own checks from
blank check stock. Most banks no longer use magnetic character readers for check
processing; so normal laser printer toner is fine for checks. The benefit of
this is that you can print up checks in smaller batches than the 500-1,000 you
normal have to order of the preprinted variety. This saves the waste of having
to toss out hundreds of unused checks when an account is closed out or your bank
is swallowed up by another one. With banks changing names on almost an annual
basis, it also allows you to update your checks much more conveniently. The
program I use is called
VersaCheck, which actually operates through my word
processing program to set up and print the checks. Other similar programs are on
A common mistake I see is when people post expense reimbursements (such as
rebates on software purchases or reimbursements received from joint office
occupants) as income. This distorts the true income generated by the business
and could end up costing you money because many organizations and jurisdictions
base their charges or business license fees on the gross revenues. In technical
terms, these are "contra expenses," which should be categorized either
against the exact same expense categories as the original expenditures or at
least put them in a category that is set up as an expense and not an income
Balance Sheet vs. Income Statement Activity
Another big mistake that could be potentially very expensive tax-wise is how
people are recording their loan activity and transfers between accounts. When
you move money between bank accounts, that is a nontaxable event which should
not show up at all on your income statement. Money borrowed or paid on loan
principal also has no business showing up in your income statement. You can make
the QuickBooks entry from the register for either of the accounts that is involved.
Just don’t repeat it again in the other account’s register. By all means, do
not set up expense categories for Loan Payments or Transfers, which I often see
done. See Asset Purchases above.
You should try to pay your purely personal expenses from your personal bank
account. When money has to be loaned from you to the company, or vice versa, it
should be run through a liability account called "Shareholder Loan."
While the term "Dividends" is fine for payments taken from an
S-corporation, it doesn’t work as well with a C corporation. Money taken out
as dividends is taxed twice, something we definitely want to avoid. Money should
be taken out as either consulting income to yourselves, lease payments for your
home office and equipment, royalties for the use of the business name &
style, and/or as loans.
This is a commonly mishandled item for owners of rental property. If these
are truly refundable to the tenants, and not just prepayments of rent, they need
to be set up as their own liability accounts on your balance sheet. IRS does not
require you to report true security deposits as rent income. However, anything
that you have designated as "Last Month’s Rent" is required to be
reported as rent income in the year received, even though the actual last month
may be several years down the road. Setting these up in their own liability
account also makes it easy to track security deposits held in case of a sale or
a dispute with a tenant. If a tenant does leave and forfeit his deposit, you
need to make an entry reducing the security deposit account with an offsetting
increase in the "Rent Income" or "Forfeited Deposits"
As new upgrades are released for the program, they are available from Intuit’s
web site. It’s practically automatic if you access it from the QuickBooks
program. It will also update the values of any securities that you specify.
This page was most recently modified on:
Sunday, January 29, 2012