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.

Setting Up  Accounts

    Classes

Restoring Backup Data Files

Using Multiple Versions of QuickBooks On One Computer

Contents:
Separate Files
 

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 reports.

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.

Even if they are going to be expensed under Section 179, 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.

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 item.

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" category.

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.